Pensionable Pay and Auto Enrolment

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Caroline Castle, from Torquil Clark, provides monthly guidance on auto enrolment topics that employers should pay particular attention to.

For those employers who have already been running a pension scheme prior to auto enrolment, the term “pensionable pay”, will not be a new one. Prior to your staging date, as an employer providing a pension scheme for your employees, you had to determine the earnings on which pension contributions are calculated. You were able to decide what counted in the assessment of contributions. If your employees experienced great fluctuations in earnings, thanks to overtime, commission or bonuses, these could be ignored for the most part in determining the pension contributions for that individual. As such you were able to budget reasonably accurately for the contributions drawn.

So how is this affected by auto enrolment?

From your staging date onwards you need to be using one of the four definitions of earnings specified by The Pensions Regulator. These may mean that even your existing members require a different level of contribution from the past, based on the new pensionable earnings definition. You can decide which definition to use, but once you have done this, part of your registration with The Pensions Regulator includes the certification of which route you will be using, to manage your scheme.

So what are the four definitions and what are the differences?

  1. Qualifying Earnings
  2. All income of all types will need to be included in the definition of Qualifying Earnings. Overtime, shift allowance, bonus, commission and car allowance are all thrown into the mix for each and every pay period. Only then, by applying the set parameters of a threshold of £5,772 (2014/15 tax year) and a ceiling of £41,865 (2014/15 tax year), will you be able to determine the exact “pensionable pay” for your employees, based on these total earnings. Using this definition will require an 8% overall contribution on this band of earnings for members by October 2018 and a minimum starting rate of 1%, from staging to October 2017, for both employer and employee.

    Typically this definition produces the lowest contribution bill for both parties.

  3. Total Earnings
  4. Again all earnings from all sources need to be included. With this definition however there is no threshold and no ceiling applied. Contributions are effectively based on whatever is earned and are thus very simple to calculate. Using this definition will require a 7% overall contribution by October 2018, and once again the starting rate is 1% for both parties from staging date until October 2017.

    Contributions are likely to vary considerably though in line with the fluctuations in earnings.

  5. Basic Earnings
  6. If you do not want the fluctuations that Total Earnings could introduce and want to manage the contributions much more steadily, then you can use basic pay. However, whilst this definition does not include commission or overtime, other statutory payments such as sick pay, maternity pay and holiday pay all need to be incorporated in the basic earnings definition and assessed for each and every pay period.

    Be mindful too that you will still need to calculate the total earnings for all employees, as it is these that will drive the assessment for those eligible for auto enrolment and the basic pay earnings are thus only used for calculating the contributions. Furthermore, this definition will introduce the highest contribution scale, namely 9% by October 2018 and the only definition which requires you, as the employer, to pay 2% from staging date and more than your employee’s 1%.

  7. Basic Earnings (85% of Total Earnings definition)
  8. The fourth definition uses both total and basic earnings. If you can confirm that your basic pay definition creates a payroll that is at least 85% of your total payroll, this definition can be useful. This restriction is not to be assessed for each and every employee but across your payroll as a whole. In addition this definition allows you to cap the overall contribution by October 2018 at 8% and you can start at an employer contribution of 1% from your staging date, should you wish to do so.

    Once you have elected which definition to use, part of your employer duties will be to ensure that your scheme is managed in accordance with the definition you have selected. You will also need to undertake regular reviews to check that you are sticking to the parameters you have elected.

    As with all aspects of auto enrolment, the choice that is offered can be confusing and advice from your Employee Benefit Consultant will be invaluable to ensure you not only select the definition that is right for you and your business, but that your scheme is managed in accordance with the requirements that this definition imposes.

    To find out more about Auto Enrolment, visit or call 01902 576707.

    Torquil Clark Ltd is authorised and regulated by the Financial Conduct Authority. Not all Auto Enrolment services are regulated by the Financial Conduct Authority. Consultancy charges apply.

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stopwatchCaroline Castle, from Torquil Clark, provides monthly guidance on auto enrolment topics that employers should pay particular attention to.

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