The earnings basis describes the type of earnings used when pension contributions are worked out.
If an earnings basis other than qualifying earnings is selected, self-certification is required at least every 18 months to confirm that the chosen basis meets the minimum requirements.
You can find a template for this on the government’s website (Annexe E).
There are 4 main definitions:
- Qualifying earnings: worked out using total pay* but only between the £6,240 and £50,270 thresholds (2023/24). Minimum contributions – Employer: 3% | Total: 8%. Here’s how to calculate contributions using the thresholds.
- Set 1: pensionable earnings (basic): worked out using at least basic pay^. Contributions from first £1 earned – no thresholds. Minimum contributions – Employer: 4% | Total: 9%. Must certify at least every 18 months.
- Set 2: pensionable earnings (85%): worked out using at least basic pay. When combining all employees using this set (including all employees you’re certifying for), the average basic pay must always make up at least 85% of the average total pay. Contributions from first £1 earned – no thresholds. Must certify at least every 18 months. Minimum contributions – Employer: 3% | Total: 8%.
The employer must monitor this. If the employee’s earnings change each year, you’d normally need to look at what was earned in the past to check if they’re likely to meet this minimum before certifying on this basis.
For example, James earns £20,000 per annum basic salary, and £5,000 in overtime. As his basic pay of £20,000 is less than 85% of his total earnings of £25,000, you cannot use just his basic pay to work out pension contributions.
- Set 3: total earnings: worked out using everything that an employee is paid. Basic pay, plus all other earnings. Contributions from first £1 earned – no thresholds. Must certify at least every 18 months. Minimum contributions – Employer: 3% | Total: 7%.
*What is total pay? – Includes basic pay, and any commission, bonuses, overtime. This list is not exhaustive, and employers may include other types of pay.
^What is basic pay? – Includes all earnings in an employee’s basic salary. It also includes statutory sick pay, statutory maternity pay, ordinary or additional statutory paternity pay, and statutory adoption pay.