What is pensionable pay?
What exactly is pensionable pay? This simple guide will explain what pensionable pay is, how it is calculated, and how it adds to your overall pension. Our Pensions Help Centre is designed to help you make decisions about your pension with confidence.
Pensionable pay is the money that can be used to contribute toward your pension. Sometimes called pensionable earnings, it can include:
- Basic salary
- Shift allowance
It is also often referred to as pensionable salary. Your pensionable pay can be calculated in many different ways and determines how much you can contribute to your pension. It’s important to note that different pension schemes can calculate an employee’s pensionable earnings differently.
How does pensionable pay add to my overall pension?
All contributions to your pension are based on the pensionable pay that you receive from 1st April to 31st March – this time period is called a ‘scheme year’.
Employers also make contributions to their employees’ pension based on a percentage of the employees’ earnings. It is now compulsory for all employers to enrol their workers into a pension scheme as part of a government initiative called ‘automatic enrolment’.
Automatic enrolment pension contributions
Automatic enrolment is a government initiative created to ensure employees aren’t missing out on the benefits of a pension. Automatic enrolment does exactly what it says on the tin – all employees must be automatically enrolled on to their employer’s company pension scheme when they are hired.
This scheme was introduced in 2012 and also stipulates that employers must make automatic enrolment pension contributions. However, it is not mandatory for workers to be a part of the scheme – you will be automatically enrolled, but can simply opt-out at any time.
Calculating pensionable pay
There are many methods that employers use to calculate the pensionable pay of their employees, but here are three of the main ways it can be done:
Qualifying earnings is a band of earnings that can be used to calculate contributions for auto enrolment. For the 2020/21 tax year, this band is between £6,240 and £50,000 a year. However, it’s important to note that these bands are reviewed each year by the government and are subject to change.
If using this method of calculating pensionable pay, employers will contribute a percentage of their employee’s annual earnings between £6,240 and £50,000. However, the first £6,240 won’t be included in a qualifying earnings calculation.
Qualifying earnings can consist of any of the following:
- Statutory sick pay
- Statutory maternity pay
- Paternity pay
- Statutory adoption pay
Anyone who is currently employed has basic earnings. These are earnings that exclude any additional income like commission and overtime.
A total earnings calculation is the opposite to a basic earnings calculation. It means that all earnings are factored into the calculation of pensionable pay – right from the first pound you earn.