What’s an earnings basis?

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 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 3 main definitions:

  1. Qualifying earnings – includes salary, wages, commission, bonuses, overtime, statutory sick pay, statutory maternity pay, ordinary or additional statutory paternity pay and statutory adoption pay. However, pension contributions are only calculated by looking at the band of earnings between £6,240 and £50,270 a year (for the 2021/22 tax year).
  2. Pensionable earnings– this is also called ‘self certifying’. You’ll have the choice of one of the following sets:

Pensionable earnings (set 1) – contributions are worked out on at least basic pay. Basic pay includes at a minimum, earnings before deductions, holiday pay and statutory benefits such as: maternity, paternity, adoption and sick pay delivered through the payroll.

For example, Sarah earns £20,000 per annum basic salary, and £1,000 in overtime. You can choose to use basic pay or include overtime when working out pension contributions.

Pensionable earnings (set 2) – contributions are worked out on at least basic pay. But the key difference between this and set 1 is basic pay must make up at least 85% of total earnings. 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.

The minimum contribution levels vary if you’re using pensionable earnings. Find out more about the minimum contribution levels on our website.

  1. Total pensionable earnings– (also called total pensionable earnings set 3) includes salary, wages, commission, bonuses, overtime, statutory sick pay, statutory maternity pay, ordinary or additional statutory paternity pay and statutory adoption pay. Other pay components can be included and this list is not exhaustive. Unlike qualifying earnings, contributions are worked out from the first pound earned, with no lower or upper bands.

The minimum contribution levels vary if you’re using total earnings. Find out more about the minimum contribution levels on our website.

For more on each of the above, refer to The Pensions Regulator’s website.

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