Workers with fluctuating earnings
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.Mon May 30 09:39:00 BST 2016 Back to results
For the purpose of Pensions Reform, earnings include salary or wages, commission, bonuses, overtime payments, statutory sick pay, statutory maternity pay, ordinary or additional statutory paternity pay and statutory adoption pay. This means some workers’ earnings may fluctuate due to, for example, bonus or commission payments. This can make the auto enrolment process trickier for the employer.
If earnings fluctuate, the employer will have to check in each pay reference period whether or not the worker is classed as an eligible jobholder, non-eligible jobholder or an entitled worker. Employers can choose between two definitions of pay reference period (assuming their scheme provider allows). See our Pay Reference Periods FAQs for more details.
As soon as earnings in a pay reference period go above the earnings trigger for automatic enrolment (£10,000 in the tax year 2016/17), the worker will have to be automatically enrolled, assuming they meet the other conditions for an eligible jobholder as well (i.e. aged at least 22 and under state pension age and working/ordinarily working in the UK).
Once the eligible jobholder is automatically enrolled, if their earnings in a subsequent pay reference period fall to the lower limit of the qualifying earnings band or less (£5,824 in the 2016/17 tax year), the employer can (but does not have to) stop paying contributions for the worker. However, if in any subsequent pay reference period, the worker’s earnings rise above the lower limit of the qualifying earnings band again, and the worker is still under State Pension Age and working/ordinarily working in the UK, the employer must immediately automatically re-enrol the jobholder and start paying contributions for them again.
How do you calculate contributions for jobholders with fluctuating earnings?(Expand content) (Minimise content)
For the purposes of ensuring that the minimum contribution level is being paid for jobholders, the employer will have to measure the contribution paid for each eligible jobholder over the pay reference period. This pay reference period is different from the one mentioned above. Employers can choose to use one of the three following definitions of pay reference period for this purpose:
- A period of 12 months, starting on the staging date and ending 12 months later
- A period equal in length to the interval between the usual payments of a jobholder’s wages or salary (assuming their scheme provider allows), or
- A period over which the normal salary or wages is paid, aligned with the relevant tax period (assuming their scheme provider allows).
(Our Pay Reference Period FAQs has more information on this)
If the employer chooses option 1), they will be testing that the minimum contribution has been met over a 12-month period. However, for those employees with fluctuating earnings, it’s unlikely that the contribution paid in each week/month (depending on how employees are paid) will be a fixed amount. Instead the employer is likely to have to calculate the contribution every time it’s paid to make sure the fluctuating earnings are taken into account correctly. Before the end of the pay reference period, the employer will need to double check that the minimum contribution level over that period is met.
For this reason, options 2) or 3) may be more attractive to employers as they won’t have to carry out an ‘end of pay reference period’ reconciliation.
Pensions Technical Services