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27th March 2024

Everything You Need To Know About Employee Pensionable Earnings

If you’re employing people, you must offer a workplace pension scheme. The company, your employee and the government pay into their pension, and you must auto enroll every eligible employee.

Who is Eligible for a Pension?

Eligibility for a pension requires being classified as a 'worker', aged between 22 and the State Pension age, and earning over £10,000 annually in the UK. Should an employee meet all these criteria, it becomes the employer's responsibility to automatically enroll them in a pension scheme and make contributions. Given the growing complexity of pension and payroll laws, ensuring compliance with UK regulations can be exceptionally time-consuming. There are circumstances where an employer's automatic enrolment responsibilities may be mitigated. Effectively managing employee payroll and pensionable earnings necessitates a thorough and current understanding of the tax system and employee benefits.

Summary:

  • For employees to qualify for auto enrolment they must:

  • Be between the ages of 22 or over and the state pension age

  • Earn a minimum of £10,000 a year

Employees who aren’t eligible can also opt in to this scheme

Employees who do not meet the criteria for the pension scheme still have the option to voluntarily participate. Upon enrolling your employees in the scheme, certain obligations arise.

As an employer, it is imperative to ensure that minimum contributions to the pension scheme are paid by the 22nd of each month. Additionally, employees retain the right to 'opt out' of the scheme if they so desire, with the provision that any contributions made by them are refunded within one month of their enrolment. Employees are afforded the opportunity to rejoin the scheme at least once annually, even if they had previously opted out. Similarly, employers are entitled to re-enrol their employees into the scheme every three years, notwithstanding any prior opt-outs, provided the employees remain eligible for automatic enrolment. These measures serve to uphold the rights and responsibilities of both employers and employees within the framework of UK pension legislation.

Summary

  • Pay the minimum contributions to the scheme by the 22nd of every month

  • Allow employees to ‘opt out’ (leave) the scheme if they request it and refund any funds paid within one month of joining

  • Employees can rejoin at least once a year even if they’ve opted out

  • Enroll your employees back in every three years even if they have opted out and they’re still eligible for automatic enrolment

As an employer, there are certain things you cannot do, including:

It is prohibited to coerce or incentivise employees to opt out of the pension scheme. Discrimination against employees who choose to remain within the scheme is also unlawful. Offering preferential treatment or implying greater job prospects to those who opt out is strictly prohibited. It is illegal to terminate a pension scheme without providing alternative arrangements and automatically enrolling members into another scheme.

Both employers and employees are obligated to make minimum contributions to the pension scheme, as stipulated by the Government. However, determining these contributions can be complex, as they are contingent upon factors such as 'pensionable pay' or 'pensionable earnings', which can be calculated in various ways. Hence, it is crucial for employers to ensure compliance with these regulations and accurately calculate contributions to avoid legal ramifications and ensure the financial security of their employees in retirement.

Summary:

  • Forcing or encouraging your employees to opt out of the scheme is prohibited

  • You cannot discriminate against employees for choosing to stay in the scheme

  • You cannot offer a role or imply someone is more likely to get a job should they opt out of the scheme

  • You cannot close a scheme without offering and automatically enrolling members into another one

How to calculate employees pensionable earnings

What are pensionable earnings?

Pensionable earnings refers to the amount of pay that pension contributions are taken from your employees basic salary before any overtime, commission or bonuses. Employees must contribute 5% and employers must contribute 3% of this. However, some schemes do include bonuses, overtime and commission. It is up to you (or your HR or accountancy team) to figure these contributions out. There are three ways; qualifying pay, basic pay and total earnings.

Summary:

  • Employees must contribute 5%

  • Employers must contribute 3% as a minimum

Using basic pay

If you’re working out an employee’s pension through basic pay, any bonuses or overtime isn't included. For a salary of £48,000, your business will contribute £1,140 and the employee contributes £1,900.

Using qualifying earnings

Another way to work out an employee’s pensionable earnings is by working out their qualifying earnings. This is often used for defined benefit pension schemes, Qualifying earnings are a portion of your employees salary. The minimum band is £6,240 and the maximum is £50,000. Qualifying earnings account for basic pay, bonuses, overtime and all other earnings. For example, if your employee is paid £48,000 a year and gets a £2,000 bonus, meaning they earn a total of £50,000 per year. £6,240 is then subtracted from their total earnings, which leaves £43,760 as pensionable earnings. Your employee will contribute £2,288 a year, and the business contributes £1,312.

Using total earnings

In this instance, the total earnings for the year is £50,000. Your organisation contributes £1,500 (3%) and your employee contributes £2,500 (5%). If you’re using total earnings or qualifying earnings as a method of calculating pensionable pay, the following are all pensionable.

  • Holiday pay

  • Overtime

  • Bonuses

  • Commission

  • Statutory Sick Pay

  • Maternity and Paternity leave

  • Basic pay

  • Adoption pay

What about employees who are above the threshold?

If you’re using qualifying earnings to work out pensionable pay, employees earning over £50,000 must still be auto enrolled, but capped at £50,000. For total earnings, there is no limit to their pensionable earnings, aside from the annual pension allowance and lifetime allowance.

Calculating pensionable earnings with Payescape

It’s important to ensure you’re paying the right pension contributions to your employees, otherwise you're at risk of being fined by HMRC. Our Payroll and HR software is designed to be used in conjunction with several pension providers, including Smart Pension, The People’s Pension and more. At the moment, we offer integration through Excel, CSV and APIs through Middleware - we’re currently working on direct APIs with main pension providers. From auto enrolment to ensuring employee records are stored properly, and accurately calculating pensionable pay, we’ve got you covered. Request a demo.

Last updated 27/03/2024

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