Introduction
The earnings on which pension contributions can be deducted can be calculated in a few different ways. This article describes and provides examples of the different types of pensionable earnings to consider, this will most likely be determined by the employer or pension provider.
Qualifying Earnings
Qualifying earnings are the earnings on which auto enrolment minimum contributions are based.
Qualifying earnings include:
Basic salary or wages
Commission
Bonuses
Overtime
Statutory Sick Pay
Statutory Maternity Pay
Ordinary or Additional Statutory Paternity Pay
Statutory Adoption Pay
Of the total of the qualifying earnings, a pension deduction should be taken on the earnings between the Lower and Upper Earnings Threshold.
The thresholds for pensionable qualifying earnings for the 2020/21 tax year are £6,240 to £50,000.
For example
Employee has qualifying earnings for the month of £2000
The Lower Earnings Threshold per month is £520
Total pensionable earnings are £2000 - £520 = £1480
5% employee contribution on £1480 = £74.00
3% employer contribution on £1480 = £44.40
Basic Earnings
Basic earnings on earnings that do not fluctuate, which could be just basic pay, or basic pay plus any contractual allowances.
Unlike Qualifying Earnings, basic earnings are used in full for pension contributions with no need to deduct only earnings between the Lower and Upper Earnings Threshold.
For Example
Employee has £2000 base pay
Total pensionable earnings are £2000
5% of employee contribution on £2000 = £100
3% of employer contribution on £2000 = £60
Total/ Gross Earnings
Total earnings takes in to account all earnings the employee has, including fluctuating earnings such as overtime and bonus.
Total Earnings have no threshold before pension contributions are deducted.
For Example
Employee has £2000 base pay and £500 bonus
Total pensionable earnings are £2500
5% of employee contribution on £2500 = £125
3% of employer contribution on £2500 = £75