What Are Qualifying Earnings?!

At Alderley Payroll Services we believe it’s really important employees understand how their pay is calculated. One question frequently asked is, “what are qualifying earnings?” To answer that in one sentence quoting from the NEST website,

“Qualifying earnings is the name given to a band of earnings that you can use to calculate contributions for auto enrolment.”

Before we delve any further it should be noted different pension schemes have different methods to achieve the earnings used for pension calculation. What I am going to explain here is the most common method used, which is qualifying earnings.

Qualifying earnings are earnings that fall between £520/mth – £4,189/mth. So instead of using an employee’s entire earnings for that period, you need to first calculate the qualifying earnings used for the pension calculation. The table below shows the different levels of qualifying earnings depending on the pay period.

Pay reference period
2021/22Annual1 weekFortnight4 weeks 1 month1 quarter Bi-annual
Lower level of qualifying earnings£6,240£120£240£480 £520£1,560£3,120 
Earnings trigger for automatic enrolment£10,000£192 £384£768£833£2,499£4,998 
Upper level of qualifying earnings£50,270£967 £1,934£3,867£4,189 £12,568£25,135 

Example 1, if an employee earnt £2,000/mth gross, the calculation to achieve the qualifying earnings would be,

2,000 – 520 = £1,480

Now we have the qualifying earnings we can use this to calculate the pension contributions.

Example 2, if an employee earns below £520/mth the employee wouldn’t have any contributions even if the employee was enrolled into the workplace pension scheme. If the employee next pay period earns more than £520 they will have pension contributions for that period.

For one last example, the employee earns £5,000/mth. The calculation would be,

4,189 – 520 = £3,669

You will notice in the example above as the employee earns £5,000/mth this is over the upper earnings level and therefore £4,189 is used instead in the calculation of the qualifying earnings.

If you want to now carry on calculating the contributions…

Currently the minimum pension contribution required is 3% employer and 5% employee. Another thing to point out now is the employee contribution you see deducted through the payroll might be 4%. Whether 4% or 5% is deducted through the payroll is dependent on whether the pension is a relief at source or net pay arrangement. This is a topic in itself and warrants another blog post. For now I’m going to use the relief at source method as this is the most commonly used. Relief At Source means the worker contributes 80% of the total contribution, whilst the government contributes the remaining 20% directly to the pension scheme.

To calculate the employee contribution, we now need to calculate 4% of the qualifying earnings using example one above,

4% of 1,480 = £59.20

To calculate the employer contributions, we do the same as the above but based on 3% of the qualifying earnings, 3% of 1,480 = £44.40

To finish this example off the government contribution would be 1% of £1,480 = £14.80, this however wouldn’t show on the payroll.

For further information regarding auto enrolment and employer workplace pension duties please click workplace pension duties.

If you are an employer/business adviser and looking for detailed guidance head to The Pension Regulator website.

www.thepensionsregulator.gov.uk/en/business-advisers/automatic-enrolment-guide-for-business-advisers

We have previously posted articles on re-enrolment duties which you can find here and if there are any other subjects, whether that be workplace pensions, or anything else to do with PAYE and payroll please get in touch and we can look at doing a bog post on it.