This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at May 2023.
Legislation uses ‘pay reference period’ for two different purposes:
- for measuring a worker’s earnings to determine which category they are in and, accordingly, what duties an employer has in relation to them, and
- for determining whether the 'quality requirements' are met in relation to a jobholder (i.e., for a money purchase scheme calculating the minimum contribution level for each jobholder).
Let’s look at each in turn.
The pay reference period, for the purpose of assessing a worker’s earnings to determine their category (eligible jobholder, non-eligible jobholder or entitled worker), can be aligned to either:
- the period over which the worker is paid their regular wage or salary, or
- tax weeks or months.
Employers can choose the definition that suits them best if the scheme provider offers the choice. There is nothing to stop an employer using one definition for one group of workers and the other definition for another.
The period over which the worker is paid their regular wage or salary
This is where a worker’s pay reference period is the period by reference to which the worker is paid their regular wage or salary. If a worker is paid weekly, the pay reference period lasts for one week. If they are paid by reference to a period longer than a week (for example, monthly), the pay reference period lasts for that longer period. Note that someone who is paid more frequently than weekly is excluded from assessment under this definition.
When assessing the worker’s qualifying earnings to determine their category, the employer will need to identify the relevant pay reference period – this is the pay reference period in which the assessment date falls.
Once they know the relevant pay reference period, earnings that are payable (not necessarily earned) in that pay reference period are used in determining whether the worker is a jobholder (having earnings above the minimum qualifying earnings limit of £6,240*), or an eligible jobholder (having earnings above the automatic enrolment trigger of £10,000*).
*2023/24 figures
Tax weeks or months
Employers can align pay reference periods to tax periods (providing their scheme provider is willing to administer the scheme on this basis).
Under this definition, the length of a pay reference period is the period over which a worker is usually paid their normal regular wages or salary or one week, whichever is longer. (This means that under this definition, someone who is paid more frequently than weekly will be included for assessment purposes). Once the employer determines the length of the pay reference period, it will be aligned with the relevant tax period. For example:
Interval between normal payments of wages/salary |
Pay reference period |
|---|---|
One week |
Pay reference period is a week, beginning on the first day of the tax week. The first pay reference period in the tax year starts on 6 April |
Four weekly |
Pay reference period runs for 4 weeks. The first pay reference period in a tax year starts on 6 April |
Monthly |
Pay reference period aligns with a monthly cycle starting on 6 April |
Multiple of weeks or months |
The pay reference periods align with a cycle starting on 6 April |
A breakdown of tax weeks and months can be found in TPR’s detailed Guidance number 3 – Assessing the workforce, Appendix A: Pay reference periods
Example:
Sam is paid on 25 October 2021 for work done during the whole month. The length of his pay reference period is one month. It starts on 6 October 2021 and ends on 5 November 2021.
The relevant pay reference period is the one in which the assessment date falls. So, in the above example, if Sam’s assessment date is 1 November 2021, the relevant pay reference period will be the one that runs from 6 October 2021 to 5 November 2021.
Special rules apply for a pay reference period that spans the end of the tax year. See the last section of this part of the guide for more details.
For a defined contribution scheme to be a qualifying scheme or an auto-enrolment scheme, the quality requirements must be met. These include:
- the employer must make contributions in respect of the jobholder,
- the total minimum contribution must be at least 8% of the jobholder’s qualifying earnings in the relevant pay reference period, and
- the minimum employer’s contribution must be at least 3% of the jobholder’s qualifying earnings in the relevant pay reference period.
The relevant pay reference period used here is different from that used to assess the workforce, and can be defined in one of three ways:
Definition 1 – a 12-month period
The pay reference period is a 12-month period starting on the employer’s duties start date and ending the day before the anniversary of the duties start date. Subsequent pay reference periods begin on the anniversary of the employer’s duties start date and run for 12 months. It’s possible for the pay reference period to be shorter than 12 months, if for example, a jobholder is auto-enrolled part way through a pay reference period or leaves employment before the end of a pay reference period.
This guidance from TPR has some examples of when a pay reference period can be shorter than 12 months.
Definition 2* - Where the pay reference period is based on actual pay periods.
This definition sets the pay reference period as a period equal in length to the interval between the usual payments of a jobholder’s wages or salary. For example, if a jobholder is paid monthly, the pay reference period is one month.
Definition 3* - Where the pay reference period is aligned with tax periods.
The pay reference period is equal in length to the usual period over which the normal wage or salary is paid and then it’s aligned with the relevant tax period. For example:
Interval between normal payments of wages/salary |
Pay reference period |
|---|---|
One week |
Pay reference period is a week, beginning on the first day of the tax week. The first pay reference period in the tax year starts on 6 April |
Four weekly |
Pay reference period runs for 4 weeks. The first pay reference period in a tax year starts on 6 April |
Monthly |
Pay reference period aligns with a monthly cycle starting on 6 April |
Multiple of weeks or months |
Pay reference period aligns with a monthly cycle starting on 6 April |
If there is not a usual interval between the normal payments of wages/salary or the usual interval is less than a week, then the employer cannot use this definition of pay reference period.
A breakdown of tax weeks and months can be found in TPR’s detailed Guidance number 3 – Assessing the workforce, Appendix A: Pay reference periods.
Special rules apply for a pay reference period that spans the end of the tax year. See the next section of this guide for more detail.
Example:
If Jack is paid monthly on the 20th of the month for the work done in that calendar month, his pay reference period will run for one month, from 6th of the month to the 5th of the following month.
If Linda is paid quarterly, her pay reference period will run for 3 months and will begin on 6 April, 6 July, 6 October or 6 January, whichever is relevant.
* In definitions 2 and 3 above, the first relevant pay reference period is the first full pay reference period starting on or after the date the worker is both a jobholder and an active member of a qualifying scheme.
This means that employers who use either of these definitions of pay reference period don’t need to deal with calculating part contributions in the first pay reference period.
Example:
An employer’s duties start date is 1 December 2022, and Annie is auto enrolled on this date. Her pay reference period for quality requirements purposes is aligned with tax months, so the first relevant pay reference period for Annie is 6 December 2022 – 5 January 2023. This is the first full pay reference period after she is a jobholder and an active member of the scheme.
Last pay reference period:
* In definitions 2 and 3 above, where a person ceases to be a jobholder of the employer or stops active membership of a qualifying scheme, the last pay reference period is the period in which that change happens. This means the final pay reference period is a full pay reference period, not a part period.
More information relating to pay reference period for the purpose of calculating the minimum contribution level can be found in The Pensions Regulator guidance.
Tax year end when using pay reference periods aligned with the tax year.
Where an employer is using pay reference periods that are aligned with the tax year for assessing the workforce, calculating minimum contributions or both, care should be taken at the end of the tax year.
Where a pay reference period includes 5 April, the next pay reference period starts on 6 April. This makes sure that pay reference periods continue to run in line with the tax year.
If the qualifying earnings for an individual for the pay reference period that includes the 5 April, aren’t paid until on or after 6 April, that pay reference period is ended early, on 5 April. This prevents the same earnings being used in two different pay reference periods (and prevents two deductions of contributions from the same pay when using this definition of pay reference period for the purposes of minimum contribution entitlement).
Weekly pay reference periods or pay reference periods based on multiples of weeks or months could cross a tax year.