Calculating pension contributions

Master or super trust-based pension contributions do not have to be based on an employee’s total pay. Employers can choose one of three different earnings bases to calculate contributions:

qualifying earnings – these differ from the way most plans previously calculated pensionable pay by including variable aspects such as bonus, overtime and commission payments, but must be more than £5,824 and less than £42,385 for the current 2015/16 tax year

pensionable earnings – employers choose their own definition of earnings which can include bonuses, overtime, performance-related pay, and commission

total pay – this means basing contributions on every pound an employee earns from an employer, including wage/salary, overtime, bonus, commission and any other earnings, and is considered the ‘gold standard’ for new pension schemes.

It should be noted that using qualifying earnings (also known as banded earnings) can lead to lower contributions and thus pensions. For example, as the first £5,824 of earnings is not included in calculations, an employee earning £20,000 would have qualifying earnings of £14,176. Similarly, for higher earners, their qualifying earnings cannot be more than £36,561 (£42,385 minus £5,824) for this tax year.