Qualifying earnings and contributions
These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of legislation at the date of publication.21 June 2018 Back to results
In order for a scheme to be a qualifying scheme in respect of a jobholder, a quality test has to be met. For a scheme that’s wholly money purchase, this involves a prescribed minimum contribution being met. For a scheme that is wholly defined benefit, this involves minimum accrual rate being met.
What is the minimum contribution required for a money purchase scheme?(Expand content) (Minimise content)
The quality requirement for money purchase schemes means the scheme (or in the case of a personal pension scheme, the agreement(s) with the provider) must require contributions to be paid at least at a set minimum level.
Once contributions are phased in (see below), the minimum level will be 8% of the jobholder’s qualifying earnings in the relevant pay reference period, with the employer being required to pay at least 3% of that.
There is nothing to stop the employer paying more than 3%, or even paying the whole 8%.
What is the pay reference period for the purpose of calculating contributions?(Expand content) (Minimise content)
For the purposes of calculating contributions, the employer can choose one of the following definitions of pay reference periods:
- A period of 12 months, starting on the staging date and ending 12 months later. Subsequent pay reference periods start on the anniversary of the employer’s staging date and end 12 months later
- A period equal in length to the interval between the usual payments of a jobholder’s wages or salary (assuming the scheme allows).
- A period over which the normal wages or salary is paid, aligned with the relevant tax period (assuming the scheme allows)
It’s worth noting that for the purposes of jobholder definition and the automatic enrolment trigger, the pay reference period is defined differently. Refer to our 'Pay reference periods' FAQs for more detail.
In a pay reference period of 12 months, qualifying earnings are the band of earnings that are above £6,032 and up to and including £46,350 (with proportionate amounts for periods of less than 12 months). These are the figures for 2018/19.
Earnings for this purpose include:
- Salary or wages
- Overtime payments
- Statutory sick pay, statutory maternity pay, ordinary or additional statutory paternity pay and statutory adoption pay
Note that benefits in kind are excluded.
Under most money purchase schemes, contributions will not be based on qualifying earnings, but on some other measure of earnings (for example, basic pay). Having to check that the contributions to be paid using such other measure of earnings at least match 8% of the jobholder’s qualifying earnings could be an onerous task for employers. So, legislation allows the employer to certify that the scheme instead meets one of three alternative quality requirements in relation to a jobholder who is an active member of the qualifying scheme. Our 'Certification and the alternative quality requirements' FAQs has more information on this.
The minimum contribution level is being phased in to allow employers to cope with the additional costs more easily. The table below shows how:
|Total minimum contribution||Including employer |
contribution of at least:
|Period to 5 April 2018||2% of qualifying earnings*||1% of qualifying earnings*|
|6 April 2018 to 5 April 2019||5% of qualifying earnings*||2% of qualifying earnings*|
|6 April 2019 onwards||8% of qualifying earnings*||3% of qualifying earnings*|
*in the relevant pay reference period
Does the employer have a right to deduct contributions from pay?(Expand content) (Minimise content)
Where a jobholder has to pay some of the contribution, their employer must deduct that amount from the jobholder’s pay. In other words, they’ll no longer need explicit authorisation from the individual to do this.
A similar right will apply where an entitled worker joins (rather than being auto-enrolled into) an occupational pension scheme. Where such a worker joins a GPP, direct payment arrangements must apply. This means the entitled worker will still have to give their employer written consent before the deduction can be made. No minimum contribution or minimum accrual rate is required for these entitled workers.
When do deductions of contributions from pay have to be passed to the scheme by?(Expand content) (Minimise content)
Where someone is automatically enrolled, automatically re-enrolled or enrolled, active membership must be made effective from the relevant date (i.e. the automatic enrolment date, automatic re-enrolment date or enrolment date), so contributions/accrual must be calculated based on that date.
Where the jobholder has to contribute to the scheme, the employer must, on or after the relevant date, deduct the contributions payable by the jobholder from their pay.
Contributions deducted during the three-month period starting on the date from which their active membership of the scheme is effective must be passed to the scheme by no later than 19th or 22nd day of the month following the last day of the three-month period. The 22nd applies where contributions are passed to the scheme by electronic means; the 19th applies in all other cases. This applies to jobholders who become active members of a qualifying scheme (either through automatic enrolment/re-enrolment/ opting-in or contractual enrolment) and to entitled workers who have chosen to join their employer’s scheme.
After the three-month period, contributions must be passed to the scheme by the 19th/22nd day of the month following the month in which they were deducted from pay.
Jason is automatically enrolled by his employer on 1 June 2020. His employer will only pay the minimum 3% of qualifying earnings, so Jason has to pay a contribution of 5% (including tax relief). Jason will become an active member of the scheme from 1 June 2020.
He’s paid on the 28th of each month so his first contribution will be deducted from his pay on 28 June. Jason doesn’t opt out of the scheme, so his employer deducts a second contribution on 28 July and the third contribution on 28 August.
All three contributions must be passed to the scheme by no later than 22 September 2020 (assuming they’re paid by electronic means).
The contribution deducted from Jason’s pay on 28 September 2020 will need to be passed to the pension scheme by 22 October 2020 if paid by electronic means, or 19 October 2020 if paid by cheque.
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