Qualifying vs Total Earnings for Pensions Explained

When setting up a workplace pension, one of the first choices you’ll make is how to calculate contributions. The two most common methods are qualifying earnings and total earnings.

Understanding the difference between them will help you decide how to calculate your workplace pension contributions in a way that suits your business and supports your employees’ financial wellbeing.

This guide breaks down what each option means, how they compare, and which might be right for your business.

What Are Qualifying Earnings?

Qualifying earnings are a specific portion of an employee’s salary that’s used to calculate pension contributions.

For the 2024/25 tax year, this band sits between £6,240 and £50,270 per year (before tax). Only the earnings within this range count towards pension contributions.

Qualifying earnings include:

• Basic salary
• Bonuses
• Overtime
• Statutory payments (like sick pay or maternity pay)

Example: If an employee earns £40,000 a year, only the portion of their pay between £6,240 and £40,000 is used to calculate pension contributions.

What Are Total Earnings?

Total earnings include all of an employee’s earnings – with no lower or upper limits. That means the full amount of pay is counted when working out pension contributions.

Total earnings include:

• Entire basic salary
• Bonuses
• Overtime
• Statutory payments

Example: If an employee earns £40,000, all £40,000 is considered “pensionable pay” when calculating contributions.

How the Two Methods Compare

Both qualifying and total earnings meet auto-enrolment rules – but they lead to very different outcomes for your employees.

The table below shows how much of an employee’s salary counts as “pensionable” under each approach. As you can see, total earnings include the full salary, while qualifying earnings only cover the amount between the lower and upper thresholds.

Tip: If you want your pension contributions to reflect your employees’ full pay, the total earnings method keeps things simple and transparent.

Qualifying Earnings: Pros and Cons

Pros:

• Meets the minimum auto-enrolment requirements.
• Keeps contribution costs lower for both employers and employees.
• Useful for small businesses managing tight budgets.

Cons:

• More complex to calculate due to thresholds.
• Employees may save less over time.
• Contributions vary depending on income level.

Total Earnings: Pros and Cons

Pros:

• Simpler to calculate – no bands or thresholds.
• Employees benefit from higher contributions.
• Encourages stronger long-term saving habits.
• Aligns with businesses focused on employee financial wellbeing.

Cons:

• Higher total contributions (for employers and employees).
• May not suit very small or early-stage businesses.

What About the Basic Pay Method?

While less common, some businesses use a Basic Pay approach. Here’s how it differs from the other two methods. Basic Pay means contributions are based only on an employee’s standard salary, excluding bonuses, overtime or commission.

Pros:

• Simple and predictable contribution costs.
• Easier payroll calculations.

Cons:

• Employees with variable income could end up saving less.
• May be seen as less generous than total earnings.

Which Option Is Right for Your Business?

There’s no one-size-fits-all answer. The best approach depends on your company’s goals, budget, and culture.

• If you’re just getting started or want to manage costs carefully, qualifying earnings can make sense.
• If you want to provide a more generous and transparent benefit, total earnings could be the better fit.

Whichever you choose, make sure your pension provider and payroll system are aligned, and communicate clearly with your team about how contributions are calculated.

If you’re thinking about moving beyond qualifying earnings, find out what that looks like in practice in our guide: Why businesses are upgrading from qualifying to total earnings.

Frequently Asked Questions

Do I have to use qualifying earnings?
No. Qualifying earnings are the minimum required for auto-enrolment, but you can use total earnings or basic pay if you prefer – as long as your contributions meet legal minimums.

Does using total earnings cost more for employers?
Yes, because contributions are calculated on the full salary. However, many employers find the difference small compared to the benefits of simpler payroll and stronger employee engagement.

Are there minimum contribution requirements?
Yes. For qualifying earnings, the minimum combined contribution is 8% (employer minimum: 3%, employee minimum: 5%). For total earnings or other calculation methods, the percentages may vary depending on the scheme rules. However, these schemes must still meet or exceed the legal minimums required for auto-enrolment.

Can I offer different options for different employees?
It’s possible but not common. Most businesses choose one consistent approach for simplicity and fairness.

Can I change from one method to another later?
Yes. You can review and change your calculation method if your business needs evolve — just make sure you communicate any updates to your employees and check with your provider.

How can I transition from one calculation method to another?
Transitioning from one method to another involves several steps. Planning and clear communication will help make the transition smooth for both your business and employees.

• Consult Your Pension Provider: Ensure your chosen scheme supports the new calculation method.
• Communicate with Employees: Notify your staff about the change, explaining how it will impact their contributions.
• Update Payroll Systems: Work with your payroll provider to implement the new calculation rules.
• Certify Compliance: Confirm that the new approach meets legal auto-enrolment requirements.

Minimum Contribution Levels for Each Earnings Basis

Whichever earnings basis you choose (qualifying, basic pay, or total earnings) your scheme must meet certain minimum contribution levels to comply with auto-enrolment rules. Here’s a comparison of the current requirements:

What are the minimum contribution levels for auto-enrolment?

For most schemes, the combined minimum contribution is 8% – typically 3% from the employer and 5% from the employee. However, if you use total earnings or basic pay as your basis, you may need to self-certify that your scheme meets these requirements.

Final Thoughts

Understanding the difference between qualifying and total earnings helps you make an informed decision about your workplace pension setup.

Get in touch with us today to learn more about how we can support you and your employees on the journey to a comfortable later life.