What is the difference between qualifying earnings and pensionable earnings?
These two types of earnings are both critical factors in determining how much you’ll pay into your workplace pension every month.
Qualifying earnings is a basis used to calculate your workplace pension contributions. At the same time, pensionable earnings are the total of a basic salary plus other forms of remuneration owed.
Essentially, most payments provided permanently are pensionable, such as overtime, commission, bonuses and statutory payments such as maternity/paternity and sick pay.
What are qualifying earnings?
Qualifying earnings are used to calculate pension contributions for automatic enrolment in a workplace pension. These are your earnings before income tax, and National Insurance Contributions are deducted. Qualifying earnings fall between a lower and upper earnings band; for the 2020/21 tax year, this is between £6,240 and £50,000. These figures are reviewed every year by the government.
If your employer is using qualifying earnings to calculate pension contributions, your contribution percentage will fall between £6,240 and £50,000. So, say you earn £22,000 a year, the first £6,240 of your earnings wouldn’t be included in the calculation, so your qualifying earnings would be £15,760.
From these qualifying earnings, a threshold exists to determine your pension contribution based on monthly earnings:
- Lower level of £520 monthly earnings
- Upper level of £4,167 monthly earnings
So, say you’re paid £3,000 a month (pensionable earnings). This is below the upper earnings threshold, so only the lower earnings threshold of £520 would be deducted. The qualifying earnings on which pension contributions should be based is £2,480.
What are pensionable earnings?
All of the following are considered pensionable earnings and are, therefore, included in qualifying earnings when calculating pension contribution:
- Statutory sick pay
- Maternity/paternity pay
- Adoption pay
- Holiday pay
If qualifying earnings are being used to calculate pension contributions, the minimum contribution rate of someone’s pensionable earnings, as of 6th April 2019, is:
- Total: 8%
- Employer: 3% +
- Worker: 5% +
Essentially, qualifying earnings and pensionable earnings are both terms used to describe what your earnings are in total and what percentage of these earnings will contribute to your workplace pension.