what are pensionable earnings

A Simple Guide About Pensionable Earnings and Ways to calculate them!

Are you an employer or associated with a company as an employee? It is important to discover facts about pensionable earnings and to define them clearly, you should have a clear understanding of what are pensionable earnings. In case you have enrolled an employee of your company on the pension scheme, under UK law the minimum contributions are to make by your employee as well as the employer.

However, the question that arises here is how to make it work seamlessly and keep the minimal level maintained well. It all depends on the tensional earning figure also known as pensionable pay. Moreover, there are multiple ways to make it work out for your specific scenario. In this simple guide, we will learn about pensionable earnings and ways to calculate them. This will help you to figure out possible ways to work it out for you.


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.


Introduction to Qualifying Earnings

Before we get into the details of three common ways to calculate pensionable earnings, let’s get to know about the qualifying earnings. It is also associated with the process of calculating pensionable earnings. This is an easy way to define the benefit schemes. Several contribution scenes are also liked with this process.


If you are seeking active and instant professional help with your pensionable earnings in the UK, get in touch with one of our experts and discuss your requirements. We are available from 9:00 am – 05:30 pm Monday to Friday.


How to Calculate Your Pensionable Earnings?

As mentioned above there are three common ways to calculate pensionable earnings. You can choose one of the following ways to make your calculations. This depends on your specific requirements and circumstances that will help you to figure out which method is suitable for you. The three common methods are listed as:

  • Total Earnings Method
  • Qualifying Earnings Method
  • Basic pay Method

Total Earnings Method: The method of total earnings is very simple and easy to implement. All you need to do is have details of all the amount of money that is earned by the employee. This includes commission, bonuses, and salary. Any kind of income gained from dividends is not allowed to be a part of the process.

The contributions supposed to be made by the employer and the employee will depend on which calculating method is being used.

Qualifying Earnings Method: Have you ever heard of the slice of salty? That is what the qualifying method is all about. The current band that is set for this purpose is from £6,240 to £50,270. This includes all kinds of payments as well as bonuses. The defined benefit pension scheme is the scheme that finds this qualifying earning method as the most suitable to implement.

Basic pay Method: In the case of defined contribution schemes, the basic pay method is the most common in use. According to this method, the employee’s basic slaty without any addition of the bonuses is considered equal to pensionable earnings. Regardless of the fact that it is earned from commission or overtime hours of work.


Pensionable Earnings and Practical Examples

Let’s take the example of an employer who is contributing 3 % and the 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 process 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.


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.

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.

We hope these few minutes of reading will help you to understand the pensionable earnings and help you decide whether you want to have a pension scheme or not.


Reach out to our young and active team of well-qualified professionals to get instant help for your earnings and calculations. Give us a call on 02034411258 or request a callback.


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.

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