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April 26, 2021
How to calculate employees’ pensionable earnings
We know that, as an employer, by law we must contribute to our employees’ pension. But what are pensionable earnings? And how do we calculate them?
As an employer, you must now legally auto enrol your employees into your workplace pension scheme. Contributions must hit minimum contributions to be legally compliant and will reflect figures known as ‘pensionable earnings’ or ‘pensionable pay’.
How do I calculate pensionable pay?
Like with many things, there is more than one way to skin a cat. Pensionable pay can be calculated through the following: basic pay, qualifying earnings, and total earnings. Both employer and employee contribution will be based on one of these figures, depending on which method you use.
In this calculation pensionable earnings = the employees’ basic salary before bonuses, commission and overtime.
Qualifying earnings are currently set at the band from £6,240 to £50,270 and include all forms of payment including bonuses etc. This method is most commonly used for defined benefit pension schemes.
Total earnings is the whole kit and kaboodle. That means salary, bonus and commission. The only thing that does not contribute to this is any income from dividends.
Examples of pensionable pay calculations
The below examples work on the basis that minimum contributions are applied (3% for the employer, 5% for the employee). In the examples below, the employee earns £35,000 per year through their salary and £10,000 in commission.
Basic pay is £35,000. Therefore, the employer would contribute £1,050 and the employee would contribute £1,750.
Qualifying earnings are salary + commission (£45,000) minus £6,240, which makes £38,760. So the employer contributes £1,162.80 and the employee contributes £1,938.
Total earnings are £45,000. Contributions are 3% for the employer (£1,350) and 5% for the employee (£2,250).
Jennifer Morrell joined the Moorepay team in 2011 as a payroll consultant and, through a series of promotions, became Moorepay's Payroll Services Director in 2019. An expert in payroll legislation and law, her expertise has been featured by the Chartered Institute of Payroll Professionals.