What Are Pensionable Earnings?

Pensionable earnings are the part of an employee’s pay used to calculate pension contributions. Employers can choose how to define these earnings – usually as basic pay, qualifying earnings, or total earnings.

This guide explains what pensionable earnings mean, how they’re calculated, and how the different methods affect contributions.

If you’re ready to compare qualifying and total earnings in more detail, check out our full explainer: Qualifying vs Total Earnings for Pensions Explained

Understanding Pensionable Earnings

When you set up a workplace pension scheme, your contributions are based on your employees’ pensionable earnings – in other words, the portion of their salary you’ll use to work out how much both you and your employees pay in.

There are three recognised ways to calculate pensionable earnings under UK auto-enrolment rules.

• Basic Pay
• Qualifying Earnings
• Total Earnings

Each approach meets the legal minimum requirements for auto-enrolment but can lead to different contribution amounts for you and your employees.

Minimum Auto-Enrolment Contributions

Employers and employees must contribute at least 8% combined into an auto-enrolment pension. This usually breaks down as:

• Employer contribution: 3%
• Employee contribution: 4%
• Tax relief: 1%

Your pensionable earnings definition determines what portion of salary those percentages apply to.

The Three Pensionable Earnings Methods

1. Basic Pay

The basic pay method calculates pension contributions based on the employee’s base salary only. It excludes additional earnings like overtime, bonuses, or commission.

Example: If an employee earns £38,000 basic salary plus a £2,000 bonus, only £38,000 is pensionable under this method.

• Bonus excluded
• Pensionable earnings: £38,000
• Employer contribution (3%): £1,140
• Employee contribution (5% incl. tax relief): £1,900
• Total contribution: £3,040

This approach keeps costs predictable and calculations simple, but employees earning significant bonuses or overtime may save less over time.

2. Qualifying Earnings

The qualifying earnings method only counts income within a specific band of earnings each tax year. For 2024/25, that band is between £6,240 and £50,270.

This includes:

• Salary or wages
• Bonuses
• Commission
• Overtime
• Statutory payments (e.g. sick or parental pay)

Example: If an employee earns £40,000 (including bonuses), only the portion between £6,240 and £40,000 — a total of £33,760 — is pensionable.

• Pensionable earnings: £33,760
• Employer contribution (3%): £1,012.80
• Employee contribution (5% incl. tax relief): £1,688
• Total contribution: £2,700.80

Qualifying earnings are common for smaller businesses meeting auto-enrolment minimums, but they can be more complex to calculate and may limit how much employees save.

3. Total Earnings

The total earnings approach includes all income an employee earns — basic pay plus bonuses, overtime, and other payments.

Example:
If an employee earns £38,000 plus a £2,000 bonus, the full £40,000 is pensionable.

• Pensionable earnings: £40,000
• Employer contribution (3%): £1,200
• Employee contribution (5% incl. tax relief): £2,000
• Total contribution: £3,200

This method is simple, transparent, and ensures every pound earned counts toward employees’ long-term savings.

Related reading

If you’d like to explore the pros and cons of each method, read our full comparison: Qualifying vs Total Earnings for Pensions Explained

Worked Example Summary

Here’s how the three approaches compare:

Tax Efficiency and Salary Sacrifice

For schemes using a net pay approach, contributions are taken before tax — meaning employees pay income tax and National Insurance on a smaller amount.

Employers can also consider a salary sacrifice pension scheme, which can reduce National Insurance contributions for both the business and employees while maintaining the same take-home pay and pension pot.

Managing Your Workplace Pension

Whether you choose basic pay, qualifying earnings or total earnings, you should ensure that your method for calculation lines up with your payroll software.

Penfold makes it simple to set up or switch and manage your workplace pension, whichever calculation method you use.

Request more information today to discover how we can help your business offer a modern, flexible pension scheme.

Next steps

Thinking about moving beyond qualifying earnings? Find out why growing businesses are upgrading to total earnings.