How to manage pensionable earnings as a UK employer?

Correctly calculating pensionable earnings is critical for growing businesses to comply with the legislation overseen by the Pensions Regulator, and to ensure long-term financial well-being for staff.

What are pensionable earnings?

Defining exactly what constitutes pay for pension purposes is the first step in setting up a compliant scheme.

How is pensionable pay defined?

The term ‘pensionable earnings’ refers to the specific pay elements used to calculate pension contributions for an employee.

While this might sound straightforward, the definition can vary depending on the rules of the exact pension scheme you have set up.

In some cases, it might match the statutory ‘qualifying earnings’ definition, but in others, it might be based on basic salary alone, or total pay.

Understanding the exact definition for the context is vital, because it dictates how much money flows into the workplace pension pot.

If you get this figure wrong, you risk underpaying contributions, which can lead to fines from the regulator and unhappy staff members.

Is pensionable pay the same as qualifying earnings?

It is easy to confuse these two terms. Qualifying earnings are a statutory definition used for automatic pension enrolment between the Lower Level of Qualifying Earnings, £6,240 and the Upper Level of Qualifying Earnings, £50,270.

By law, the minimum auto-enrolment contributions must be based on at least this band unless your scheme rules certify otherwise.

On the other hand, pensionable pay is simply the salary figure your scheme uses to calculate contributions. For example, if you offer a specific ‘final salary scheme’ or ‘defined benefit plan’, the rules for what constitutes ‘pay’ might be very specific.

Most modern defined contribution schemes will use one of three certification methods, known as Sets 1, 2, and 3, to determine the pensionable figure, and we’ll outline these methods in detail below.

How do you calculate contributions and thresholds?

For the vast majority of UK employers using a standard auto-enrolment scheme, the calculations revolve around specific thresholds. These figures determine who must be enrolled, and on what portion of their pay the contributions will be based.

What are the qualifying earnings bands for 2025/2026?

For the 2025/26 tax year, the government has frozen the earnings thresholds, and looks likely to continue the freeze into 2026/27.

As wages rise, this effectively widens the net of auto-enrolment in real terms. To calculate contributions based on qualifying earnings, you will need to assess each worker’s pay against the lower and upper limits.

Usually, you will only deduct contributions on the earnings that fall between these two figures. If an employee earns less than the lower limit, no contributions are mandatory, though they may opt in to contribute. If they earn more than the upper limit, then you stop deducting on the amount exceeding that limit.

What are the current pension thresholds?

Data based on rates and thresholds for employers published by the UK government.

Which calculation method should you choose?

When setting up a scheme, you must decide which definition of pay to use. This is often referred to as ‘certification’. As mentioned above, there are three main sets used to ensure your scheme meets the minimum quality standards.

When should you use Set 1 (Basic Pay)?

Under the Set 1 method, you calculate contributions based on basic pay. This definition generally excludes variable pay elements, such as overtime, bonuses, and commissions.

Since the definition of pay is narrower, the minimum contribution percentages required are higher, in order to make sure the pot is sufficient.

This approach offers stability for budgeting, as the employer contribution is predictable.

Why choose Set 2 (Qualifying Earnings)?

Set 2 is the most common method used for automatic enrolment. In this case, pensionable earnings equal qualifying earnings. This definition generally includes variable pay elements. Therefore, you will include salary, wages, commission, bonuses, overtime, statutory sick pay, and statutory family leave pay.

Crucially, you only apply the percentage contribution to the band between £6,240 and £50,270 (annual equivalent).

This method effectively manages costs for lower earners, but requires careful and precise payroll processing, to track the thresholds across every pay period.

Is Set 3 (Total Earnings) the best option?

Using total earnings is the most generous approach. You calculate contributions on every pound and penny the employee earns, with no lower or upper limit. This includes all salary, wages, commission, bonuses, and overtime.

Many employers aiming to attract top talent choose this route. While it increases the employer cost, it simplifies the calculation significantly, as you don’t need to deduct the lower threshold.

Managing this through HMRC compliant payroll software ensures that tax relief and total figures are processed accurately without the need for any manual intervention.

What pension changes are coming in 2026 and beyond?

The rules for workplace pensions are evolving. While the thresholds for the 2026/27 tax year are expected to remain frozen at 2025 levels, significant legislative reforms are on the horizon.

Will the Lower Level of Qualifying Earnings be removed?

The Pensions (Extension of Automatic Enrolment) Act 2023 granted the UK Government powers to abolish the Lower Level of Qualifying Earnings for contributions. Currently, contributions start from £6,240. The proposed change would see contributions calculated from the very first pound earned.

The reform aims to boost the pension pots of part-time workers, and those with multiple jobs. While the government has not yet confirmed a start date, businesses should prepare for this change happening over the coming years.

When will the auto-enrolment age drop to 18?

Another major reform under the Pensions (Extension of Automatic Enrolment) Act 2023, involves lowering the eligible age for automatic enrolment from 22 to 18. This change will bring younger employees into the scheme much earlier, increasing their long-term savings through the power of compound interest.

For employers, it means a larger portion of the workforce will become eligible members, increasing the total monthly administration and cost. Adopting a dedicated HR and payroll solution that automates assessment is the best strategy to handle this increased volume of enrollees.

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