Pensionable earnings are the specific parts of your pay that your employer uses to work out how much money goes into your pension pot. Generally, you calculate them by identifying which pay elements (like basic salary or bonuses) are “pensionable” and then applying any relevant government thresholds.
Knowing exactly what counts as pensionable pay and how it is calculated will help you ensure you receive the proper pension contributions. It will also help you plan for retirement properly.
In this guide, you’ll get to know:
- What are pensionable earnings?
- What are qualifying earnings for pensions?
- How do you calculate pensionable earnings?
- And much more.
Let’s get into it!
What are Pensionable Earnings?
It is required under UK law that as an employer you have to maintain the practice of auto-enrolling your employees for the pension scheme. A minimum amount is set by the government of the UK to be contributed both by the employer and the employee. The contribution percentage is set at 5 % by the employees and a minimum of 3 % by the employer.
Many people equation what is pay considered to be exact in the discussion of pensionable earnings and its calculations. The figure we aim to get from this amount is known as pensionable earnings. It is important to know that all the earnings of an employee have nothing to do with this calculation.
The first requirement to begin the process is to figure out each employee’s pensionable earnings with the help of your accountant and his calculations. Commonly three ways are popular to work out this process that we will explain below.
What Exactly Are Pensionable Earnings?
Pensionable earnings are the specific portions of your income that are “eligible” for pension contributions. While you might assume every penny you earn is pensionable, that is actually quite rare. What’s included depends on:
- The type of pension scheme your employer uses, and
- The rules set by that scheme or provider
In the UK, most pension schemes follow one of two main models: qualifying earnings or total pensionable pay.
Pensionable Earnings and Practical Examples
Let’s take the example of an employer who is contributing 3 % and an employee who is contributing 5 %. Let’s suppose that the salary of the employee is £30,000 and the amount he gets from the commission is £20,000. See the explanation of how this figure will be processed in different ways of calculating pensionable earnings.
Total Earning Method: In this example, we can clearly see the total earnings are £50,000. This depicts that the 3 % of the employer amount is £1,500 and the 5 % of the employee’s amount to contribute is £2,500.
Qualifying Earning Method: In qualifying earning methods commission and slaty both are considered. In this example, the sum of commission and salary is £50,000. Subtract £6,240 from this amount and you will get the figure of £43,760. According to this calculation, the contribution of the employer will be £1,312, whereas the employee will contribute an amount of £2,188.
Basic Pay Method: When the basic salary of the employee is £30,000, the contribution of the employer amount is £900 whereas the employee will contribute an amount of £1500.
What Are Qualifying Earnings for Pensions?
Under auto-enrolment rules set by the UK government, pension contributions are based on your qualifying earnings. These are your earnings between the lower and upper earnings thresholds.
For the 2025/26 and 2026/27 tax years:
| Threshold | Earnings Range | Notes |
| Lower earnings limit | £6,240 | Earnings below this don’t count for pension contributions |
| Upper earnings limit | £50,270 | Earnings above this aren’t counted for auto-enrolment contributions |
So, if you earn £40,000 a year, your qualifying earnings would be £40,000 − £6,240 = £33,760. That’s the amount used to calculate pension contributions for both you and your employer.
What Is Included in Your Pensionable Earnings?
Your basic salary may not be the only type of pay which counts towards your pension. Depending on how your employer has set up your pension scheme, there could be different types of pay which are “pensionable.”
Most standard schemes in the UK include the following in the calculation:
- Basic salary or wages: Your core pay before any extras.
- Overtime: Extra hours you’ve put in during the month.
- Bonuses and commission: Performance-related pay or sales bonuses.
- Statutory pay: This includes Statutory Sick Pay (SSP), as well as Statutory Maternity, Paternity, or Adoption pay.
However, it is worth noting that some employers use a “Base Pay” model. In this scenario, they might ignore your bonuses or overtime. And only calculate contributions based on your steady, basic salary.
It’s always a good idea to check your employment contract. It’ll help you see which bucket your pay falls into.
How Do You Calculate Pensionable Earnings?
Calculating your pensionable earnings is easier than it looks. The calculation depends on which of the three main methods an employer has chosen for their scheme.
1. Qualifying Earnings (Banded Earnings)
It is the most common method for auto-enrolment. It only counts your pay within a specific “band” set by the government (currently £6,240 to £50,270).
For example, if you earn £30,000, you only pay into your pension on the amount between the lower limit and your salary. If you earn over the upper limit, anything above £50,270 is ignored for the calculation.
Formula: Total Earnings – Lower Threshold = Pensionable Earnings (capped at the Upper Threshold).
Example: If you earn £30,000, your pensionable earnings are £23,760 (£30,000 – £6,240).
2. Basic Pay
This method calculates contributions from your first pound earned. It means there is no lower threshold to subtract. However, it typically excludes variable pay like bonuses, overtime, or commissions. It is often called “Set 1”.
Formula: Basic Salary = Pensionable Earnings.
Example: If you earn a £38,000 base salary plus a £2,000 bonus, your pensionable earnings are £38,000.
3. Total Earnings
This is the most comprehensive method. Like Basic Pay, it starts from the first pound earned. But it also includes all extras like bonuses and overtime. Every penny of your gross pay counts toward your pension calculation. It is often called “Set 3”.
Formula: All Gross Earnings = Pensionable Earnings.
Example: If you earn £38,000 plus a £2,000 bonus, your pensionable earnings are £40,000.
Pensionable Earnings vs Qualifying Earnings
You will often hear these two terms used at the same time. But they mean slightly different things in the world of UK payroll.
- Qualifying earnings is a legal term. It refers to a specific band of pay set by the government. For the current 2026/27 period, this band is between £6,240 and £50,270 per year. If your scheme uses this method, you only pay into your pension on the money you earn inside that window.
- Pensionable earnings is a broader term. It simply means “the earnings my specific pension scheme cares about.” Your employer might decide that your pensionable earnings are your basic salary plus your overtime, or perhaps just your basic salary alone.
Pensionable Earning Thresholds for 2026/27
The government reviews these figures annually. For the tax year starting April 2026, the thresholds have remained stable to provide consistency for workers and businesses.
| Period | Lower Limit
(Qualifying Earnings) |
Upper Limit
(Qualifying Earnings) |
| Weekly | £120 | £967 |
| Monthly | £520 | £4,189 |
| Yearly | £6,240 | £50,270 |
Note: If you earn less than £10,000 a year (the “Earnings Trigger”), your employer isn’t legally forced to automatically enrol you, though you can usually still choose to join.
Examples of Pensionable Pay Calculations
The exact calculation of pensionable earnings depends on which of the three main methods your employer uses: Basic Pay, Qualifying Earnings, or Total Earnings
Example 1: The Basic Pay (Tier 1) Method
This is common in offices where people get a set salary plus occasional “extras” like overtime.
- Basic Salary: £2,500
- Overtime Worked: £500
- Total Gross Pay: £3,000
- The Calculation: The scheme rules say “Basic Pay Only,” so we ignore the £500 overtime.
Result: Your pensionable earnings are £2,500. Even though you earned £3,000 this month, the overtime doesn’t help your pension grow in this specific scheme.
Example 2: The Qualifying Earnings (Band) Method
This is the standard “Auto-Enrolment” way. Your employer only looks at the slice of your pay between the lower and upper limits (£520 and £4,189 per month).
- Your Monthly Gross Pay: £3,000
- The Lower Threshold: £520
- The Calculation: £3,000 minus £520 = £2,480
Result: Your pensionable earnings are £2,480. Your 5% contribution (£124) is taken from this amount, not your full £3,000.
Example 3: The Total Earnings (Tier 3) Method
In this version, your employer does not “slice” your pay or ignore the first few hundred pounds. Every penny counts.
- Basic Salary: £2,500
- Monthly Bonus: £500
- Total Gross Pay: £3,000
- The Calculation: No deductions or thresholds are applied.
Result: Your pensionable earnings are the full £3,000. Your 5% contribution would be £150.
Why Your ‘Take Home’ Pay Looks Different
It is important to remember that pension contributions are usually taken from your gross pay (before tax). But the calculation for pensionable earnings happens after any “banded” limits are applied.
For example, if you earn £2,000 a month, you don’t pay 5% of £2,000. You pay 5% of £1,480 (£2,000 minus the £520 lower limit).
This is why the deduction on your payslip might look smaller than you expected.
Common Mistakes When Calculating Pension Pay
Even with the best intentions, it is easy to get these numbers wrong. Here are a few things to keep an eye on:
- Ignoring the cap: Many people forget that auto-enrolment contributions stop once you hit the £50,270 threshold (employers can contribute on earnings above this). If you earn £70,000, your employer doesn’t have to pay into your pension on that top £20,000. Unless your contract says otherwise.
- Net vs Gross: Always use your gross pay (before tax) for these calculations. If you use your “take-home pay,” your numbers will be too low.
- Benefits in kind: Things like a company car or private medical insurance usually don’t count as pensionable earnings. Only “cash” pay is generally included.
How to Find Your ‘Pensionable Pay’ on Your Payslip?
If you look at your payslip, you might see several different “pay” figures. This can be confusing. To find the right number for your calculation, look for a line often labelled “Pensionable Pay” or “Gross for Pension.”
If that isn’t clear, compare your “Gross Pay” (your total earnings before tax) to the figure used in the pension deduction line. If the pension figure is lower than your gross pay, your employer is likely using the qualifying earnings band or excluding your overtime and bonuses.
What Happens if Employee Earnings Are Below the Threshold?
If someone earns less than the £10,000 “trigger,” you don’t have to automatically enrol them. However, if they earn between £6,240 and £10,000, they are “non-eligible jobholders.”
This means they can ask to join, and if they do, you must pay into their pension. If they earn less than £6,240, they are “entitled workers.” They can join, but you aren’t legally required to contribute a penny to their pot.
How Do I Auto-Enrol Employees if They Are Above the Threshold?
Once an employee hits that £10,000 trigger (and is aged between 22 and State Pension age), you must enrol them.
You’ll need to send them a formal letter within six weeks of them becoming eligible. You’ll also need to set up their contributions in your payroll software and start paying into their chosen scheme.
What Are Pensionable Earnings for Tier 1 Certification?
Tier 1 (often called Set 1) is an alternative way to meet your legal duties. Here, your pensionable earnings must be at least equal to the worker’s basic pay. You calculate contributions from the very first pound they earn, instead of using the £6,240 threshold. Because you are counting more of their salary, the minimum total contribution is higher at 9% (at least 4% from you).
What Are Pensionable Earnings for Tier 2 Certification?
Tier 2 (Set 2) also calculates from the first pound but comes with a specific “85% Rule.” To use this, the pensionable earnings (the basic pay) for each worker must make up at least 85% of their own total gross pay.
If your team gets huge bonuses that dwarf their basic salary, you might not pass this test. The total contribution here is 8% (at least 3% from you).
Is Overtime Pensionable in the UK?
The answer depends entirely on which of the three methods mentioned above your employer uses. If they use Qualifying Earnings, then yes, overtime must be included by law.
However, if they use the Basic Pay method, they are allowed to leave overtime out. If you are regularly working extra hours, it is worth checking your pension scheme booklet. It will help you see if you are missing out on contributions for that extra hard work.
What About Bonuses and Commission?
Similar to overtime, bonuses and commission are usually included if your employer uses the “qualifying earnings” definition for auto-enrolment. For many sales professionals, commission makes up a huge part of their take-home pay.
If your pension is only calculated on a small base salary, your retirement fund might grow much more slowly than you expect.
Pensionable Earnings vs Qualifying Earnings: Which Is Better?
There isn’t a “best” option, only the one that fits your business. Qualifying earnings are often cheaper for the business because the first £6,240 is exempt.
Still, many professional firms prefer Tier 1 or Total Earnings because it’s simpler to explain to staff and provides a better retirement outcome.
The Bottom Line
Now that the discussion of what are pensionable earnings is well explained and the required information is gathered, we can sum up finally. When you begin the process of auto-enrolling the employee for pensionable earnings, it is better to tell them which method of calculations is being used. These details could be a part of the document that you will send to your employees.
Pensionable earnings are the part of your pay that counts towards pension contributions. In most cases, your contributions are calculated only on your earnings above £6,240 and up to £50,270.
This explanation will further help the employees to have an idea of the contributions you are paying as an employer and the amount they are paying for their pension. The employees must have the detail of what type of pension scheme is being followed and what is the process if they wish to leave the pension scheme.
How Accotax Can Help
If you are feeling a bit overwhelmed by the numbers or just want to make sure your staff’s pensions are handled perfectly, Accotax is here for you.
We offer a range of packages designed to fit your unique needs.
Reach out, get an instant quote and let us help you stay compliant!
Disclaimer: The information about what are pensionable earnings provided in this article is general in nature and it does not intend to disregard any of the professional advice.
