For employers, the amount you'll need to contribute into a workplace pension scheme is based on the pensionable earnings of your employees. There are three ways you can calculate pensionable earnings. In this article, we’ll explain the differences between them and the impact this can have on your pension contributions and tax efficiency.
Pensionable earnings helps you as an employer work out how much to pay into your employee's pension. It refers to the portion of their salary you'll use to calculate how much you need to contribute.
When discussing employer pension contributions, you may come across the phrase 'qualifying earnings' - although in reality qualifying earnings is only one method of calculating pensionable earnings. More on that shortly.
Currently, companies and employees need to contribute at least 8% to an auto enrolment pension scheme, broken down as follows:
There are 3 ways you can calculate how much of your employees' earnings are eligible for employer pension contributions. They are:
Depending on the method you use to calculate pensionable earnings, the employer and employee contribution figures will vary. Which approach you use is completely up to you - all are officially recognised by HMRC.
Basic pay: The basic pay approach uses the employee's base salary or wages, including holiday pay. However, the calculation excludes additional earnings such as overtime or bonuses.
Qualifying earnings: Often used for defined benefit pension schemes, qualifying earnings only apply to the portion of an employee's earnings between £6,240-£50,270. This can include:
Total earnings: Calculations involve all income earned in employment, minus dividend payments. This includes all the additional earnings listed above.
The worked examples below demonstrate how each of these approaches impact your total employer contributions based on an employee earning an annual salary of £38,000 with a £2,000 bonus.
Qualifying earnings (£6,240 is deducted from total earnings of £40,000):
For any contributions made to a workplace pension scheme using a net pay approach (before tax), the amount of tax paid on earnings will be calculated on the lower amount. This means you won’t pay any income tax or National Insurance on your pension contributions. Opting to use a salary sacrifice pension scheme could help reduce tax obligations even further.
Whether you choose basic pay, qualifying earnings or total earnings, you should ensure that your method for calculation lines up with your payroll software.
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