Wondering about what will be your source of income in old age?How do pensionable earnings come to work in this scenario? How are they used in the UK and what is its impact?
In the UK, pensionable earnings refer to the types of income that are taken into account when calculating the contributions made to a workplace pension. These contributions are typically a percentage of your earnings that go towards building your pension pot for the future.
The specific rules can vary, depending on your employment agreement and the pension scheme you’re enrolled in. Consult with your employer or pension provider for accurate information on how your specific earnings are treated in your pension contributions. This way, you can ensure you’re making the most out of your pension plan.
Talk to our best accountants and bookkeepers in the UK at CruseBurke. You will get instant help about what pensionable earnings are whether you are running a small or large business.
What Are Pensionable Earnings?
In the UK, earnings that are used to calculate a person’s pension contributions are called “Pensionable Earnings”.
It consists of:
- Basic Salary
- Commissions
- Overtime Pay
It typically does not include income from investments or rental properties, except in special cases, such as self-employed individuals contributing to a personal pension scheme.
What Are the Earnings Thresholds for Automatic Enrolment?
For the 2025/26 tax year, there are three earning thresholds for the automatic enrolment. They are explained below:
Lower Earnings Limit (LEL)
The lower limit for the 2025/26 tax year is £6240 annually. For those who are automatically enrolled, this is the minimum level of earnings on which pension contributions are calculated.
Upper Earnings Limit (UEL)
The upper limit for the 2025/26 tax year is £50,270 annually. This is the maximum level of earnings on which mandatory pension contributions are calculated. Employers are not required to contribute earnings above this limit.
Earnings Trigger
It means that you have to be automatically enrolled by your employer if you earn £10,000 annually or more in a given tax year.
What Are the Different Types of Pensionable Earnings?
The following are the different types or methods used to calculate pensionable earnings:
Basic Pay
It includes the basic salary or wages earned by an employee before any bonuses, increments or overtime. It is fixed without any compensation or deductions.
Qualifying Earnings
It refers to the specific range of earnings set by the government between an upper and lower threshold. It includes basic salary, bonuses and statutory payments.
The lower and lower limits are reviewed by the government every year, The current lower threshold is £6,240 per year while the upper threshold is £50,270 per year.
Total Earnings
It includes all the income earned from an employee’s pay i.e; salary, wages, bonuses etc, except the dividend income.
This is the most comprehensive method as it typically includes all gross pay, but it does not include income such as dividends or rental income. Some employers choose this method as it can simplify payroll calculations, although others prefer Qualifying Earnings as it meets the statutory minimum.
How are Pensionable Earnings Calculated?
Pensionable earnings are calculated based on either qualifying earnings, total earnings, or basic pay. The specific method used is determined by your employer’s pension scheme. For most automatically enrolled employees, the total minimum contribution rate is 8% of pensionable earnings, with the employee contributing 5% (including tax relief) and the employer contributing 3%.
Using Qualifying Earnings
This method uses a government-set band of earnings for contributions. For the 2025/26 tax year, the band is between a lower limit of £6,240 and an upper limit of £50,270. Contributions are calculated only on earnings within this band.
Example: If an employee’s annual salary is £40,000:
Step 1: Subtract the lower earnings limit (£6,240) from the annual salary.
£40,000 – £6,240 = £33,760 (this is the employee’s qualifying earnings).
Step 2: Calculate the contributions. The total minimum contribution is 8% of the qualifying earnings, which breaks down as:
Employee’s minimum 5% contribution: £33,760 * 5% = £1,688
Employer’s minimum 3% contribution: £33,760 * 3% = £1,012.80
Total minimum contribution: £1,688 + £1,012.80 = £2,700.80
Using Total Earnings
This method includes all types of income from your employment, such as salary, wages, bonuses, and overtime.
Example: If an employee’s annual salary is £45,000 and they earn a commission of £10,000:
Step 1: Calculate the total pensionable earnings.
£45,000 + £10,000 = £55,000.
Step 2: Calculate the contributions based on total earnings. If the scheme uses this method and pays a total of 8% in contributions:
Employee’s 5% contribution: £55,000 * 5% = £2,750
Employer’s 3% contribution: £55,000 * 3% = £1,650
Total minimum contribution: £2,750 + £1,650 = £4,400
Using Basic Pay
This is the most straightforward method, calculating contributions based only on the employee’s basic salary and excluding variable payments like bonuses or overtime. For this to be a qualifying scheme, the total contribution rate is often higher (e.g., 9%) to compensate for the smaller earnings base.
Example: If an employee’s basic annual salary is £30,000 (and the scheme requires a 9% total contribution):
Calculate the minimum contributions on the basic pay. Assuming a common 4% employee and 5% employer split for this method:
Employee’s 4% contribution: £30,000 * 4% = £1,200
Employer’s 5% contribution: £30,000 * 5% = £1,500
Total contribution: £1,200 + £1,500 = £2,700
Additional Considerations:
Employee contributions are typically 5%, but tax relief from the government tops this up, increasing the employee contribution to effectively 6%.
What Happens if Employee Earnings Are Below the Threshold?
If an employee’s earnings are below the primary threshold, they do not have to pay Income Tax or Class 1 National Insurance contributions (NICs). Still, their eligibility for National Insurance credits depends on whether they earn above the Lower Earnings Limit.
Auto-Enrolment and Pensionable Earning
Auto-Enrolment and pensionable earnings depend on your qualifying and total earnings. Here is how:
- Qualifying earnings: Employees must be auto-enrolled if their earnings exceed the earnings trigger (currently £10,000 annually). The earnings above the lower earnings limit (currently £6,240) but below the upper earnings limit (currently £50,270) are used to calculate contributions.
- Total earnings: There is no upper limit on pensionable earnings, but contributions may be subject to the annual allowance (£60,000 for the 2025/26 tax year). The lifetime allowance was abolished on 6 April 2024, so it no longer applies.
What Special Earnings Should Be Considered for Pensionable Earnings?
There are various types of pensionable earnings, which vary from scheme to scheme but preferably includes basic salary, holiday pay and other statutory payments, because bonuses and overtime can or cannot be pensionable depending on the specific scheme rules.
Is Holiday Pay Pensionable?
Holiday pay is often included in pensionable earnings, specifically if the scheme defines pensionable earnings or qualifying earnings.
Is Overtime Pay Pensionable?
This varies on the scheme, because some schemes include overtime, especially if it is a regular or contractual. While others exclude it, considering it a non-permanent payment.
Are Bonuses Pensionable?
They are not always pensionable, if they are inclusive then it depends on that specific scheme. But if your scheme uses methods like ‘total earnings’ or ‘qualifying earnings’, your bonus will most likely be pensionable.
Is Statutory Sick Pay (SSP) Pensionable?
Yes, Statutory Sick Pay is often considered a pensionable earning.
Is Maternity, Paternity, and Adoption Pay Pensionable?
Maternity, Paternity and Adoption Pays are included in statutory payments and are generally included in pensionable earnings.
How Does Tax Relief on Pension Contributions Work?
For employees, there are two main methods for receiving tax relief on pension contributions:
Method 1: Relief at Source (RAS)
With the Relief at Source (RAS) method, your employer deducts your pension contribution from your pay after Income Tax and National Insurance. Your pension provider then claims the 20% basic-rate tax relief from HM Revenue & Customs (HMRC) and adds it to your pension.
Method 2: Net Pay Arrangement (NPA)
With a Net Pay Arrangement (NPA), your employer deducts your pension contribution from your gross pay before calculating and deducting Income Tax. This automatically reduces the amount of Income Tax you pay because the contribution is taken out before tax is applied.
Conclusion
So, after this detailed discussion of pensionable earnings, it’s important to consider that the treatment of different types of earnings in UK pension schemes can be a bit complex. Generally, holiday pay that is directly linked to an employee’s normal working hours is pensionable. Clarify any questions you have regarding your pension to ensure you’re fully informed.
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Disclaimer: The information about what pensionable earnings are provided in this blog includes text and graphics of general nature. It does not intend to disregard any of the professional advice.