Pension contributions are calculated using 'pensionable earnings', which can be calculated in three ways, depending on the pension scheme:
Qualifying earnings
Basic earnings
Total or Gross earnings
The specific method used and which pay items are included are excluded depends on your pension scheme. You might even have two schemes with the same provider that are set up differently. If in doubt, please speak to your pension provider.
For more information about overriding pensionable earnings, please refer to our Help Centre article.
Qualifying earnings
Qualifying earnings are the minimum earnings that should be used in a pension calculation. Pay types that are qualifying earnings are:
Basic salary or wages
Commission
Bonuses
Overtime
Statutory sick pay
Statutory parental pay (maternity, paternity, adoption, etc.)
Only earnings between the qualifying earnings thresholds are included in the pension calculation. The earnings thresholds for the 2024/2025 tax year are:
Level of qualifying earnings | Annual threshold | Monthly threshold |
Lower level | £6,240 | £520 |
Upper level | £50,270 | £4,189 |
If you notice your pension contributions seem low, check if your scheme uses qualifying earnings thresholds.
Basic earnings
Basic earnings typically include base pay and contractual allowances. Unlike qualifying earnings, no thresholds apply, so pensionable pay is the total of the relevant payments.
When setting up a pension scheme in PayFit to use basic earnings, the following payment types are included:
Base pay
Furlough pay
Holiday pay
Zero-hour pay
Occupational leave pay (if explicitly selected)
Leave rebalancing pay
Pay for selling annual leave
Minus deductions for buying annual leave
Backdated pay for late starters
KIT (Keep in Touch) payments
Additional payments (if explicitly selected)
Total or gross earnings
Total or gross earnings includes all pay items, such as base pay, overtime, commission, salary sacrifice deductions, etc. There are usually no thresholds to consider when calculating the employee's pensionable earnings.
Notice pay and termination payments
Generally, notice pay and termination payments are not pensionable. This is because they are typically paid after an employee has left the company and, consequently, the pension scheme.
However, some pension schemes may treat these payments as pensionable earnings. Always confirm with your pension provider whether they are included.
In PayFit, notice pay and termination payments are not automatically included as pensionable. If your scheme includes them, you can override the pensionable earnings to incorporate these amounts. For more information about overriding pensionable earnings, please refer to our Help Centre article.
Example calculations
An employee earns a base salary of £1,000 and a £500 bonus. Their pension contribution rate is 5% of their pensionable pay, while the employer's is 3%.
Qualifying earnings
Both payments are qualifying earnings, therefore the qualifying earnings are £1,500. The earnings between the lower and upper level of qualifying earnings are £1,500, minus the lower level of qualifying earnings, £520, so the pensionable earnings are £980.
Employee contribution is £980 x 5% = £49
Employer contribution is £980 x 3% = £29.40
Basic earnings
Only the base pay of £1,000 is pensionable. There are no thresholds to remove in this calculation, so the pensionable earnings are £1,000.
Employee contribution is £1,000 x 5% = £50
Employer contribution is £1,000 x 3% = £30
Total or gross earnings
Both payments are pensionable earnings. There are no thresholds to remove in this calculation, so the pensionable earnings are £1,500.
Employee contribution is £1,500 x 5% = £75
Employer contribution is £1,500 x 3% = £45