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Auto-enrolment: qualifying earnings

Melissa Goddard, Director, Pension Solutions
Melissa Goddard

Qualifying earnings is a new definition of pay introduced under the auto-enrolment legislation.

In this article Melissa Goddard, Director of Pension Solutions, explains the technical aspects of qualifying earnings for auto-enrolment and how it affects the way payroll operates in relation to worker assessment, calculation approach and certification.

Worker Assessment

Employees being automatically enrolled into a pension scheme must be assessed based on what is payable in the relevant pay reference period and how much of this is made up of qualifying earnings.

It’s important to note that worker assessment is performed against the gross qualifying earnings payable in the pay reference period and is based on the pro-rated amount relevant to their pay reference (earnings) period. So if a worker is paid monthly, the employer will compare the gross qualifying earnings for that month against the monthly lower level of qualifying earnings, currently £473.

Each pay frequency has its own lower and upper levels of qualifying earnings thresholds – if the worker is paid weekly, the amount for comparison is £109; four-weekly and it is £436, and so on.

Auto-Enrolment Earnings Thresholds 2013-2014
Pay reference period
Annual One Week One Month
Lower level of qualifying earnings £5,668 £109 £473
Earnings trigger for automatic enrolment £9,440 £182 £787
Upper level of qualifying earnings £41,450 £797 £3,454

CALCULATION APPROACH

Calculating contributions, however, varies according to your choice of pension scheme design. If you choose to automatically enrol workers into a scheme that meets the statutory minimum contribution levels, you’ll calculate contributions based on banded qualifying earnings.

In the example below, the monthly paid worker receives a regular basic salary of £35,000 pa (£2,916 this period), overtime of £250 and a bonus of £650 this period, all of which are classified as qualifying earnings. However, because this is a statutory minimum scheme, any payments under £5,668 pa / £473 per month, and over £41,450 pa / £3,454 per month (shown in green), can be ignored for contribution calculation purposes.

Qualifying Earnings

The contribution calculation is therefore made on total banded earnings of £2,981, which is made up as follows: £3,816 minus £473 (earnings below lower level) minus £362 (earnings above upper level). This equates to employer and employee contributions of £29.81 at 1% each, until October 2017, when the minimum contribution levels start to rise.

CERTIFICATION

On the other hand, employers with existing pension scheme arrangements may choose to certify them with The Pensions Regulator under one of three tiered certification levels, rather than enrol following the statutory minimums. Under these circumstances, the assessment must be made based on qualifying earnings, but the contribution calculations are made based on the definition of pay, which will either be relating to the certification tier selected, pensionable pay or total pay.

Some employers choose to use a combination of the two – a new scheme for the auto-enrolment group together with certification of existing scheme(s) for employees who are already members, or who have unexpired offers to join such a scheme.

Because qualifying earnings are so tightly linked into the assessment process, they’re also linked to pay reference periods. Employers first have to identify the period of time over which earnings are to be measured – that is; the pay reference period – then they must consider what’s ‘payable’ to the worker in the relevant pay reference period and how much of it comprises qualifying earnings.

Assessment is based on what you pay someone, not when they have earned it. For example, if a monthly paid worker is due to be paid in June for work they performed in May (that is; they are paid in arrears), then this is included in the qualifying earnings to be assessed in June, not May.

Consideration must also be given to what’s payable in the whole pay reference period, irrespective of whether the assessment date falls partway through it, such as in the case of a mid-period new starter or someone turning 22 three days before the end of the pay reference period. Indeed, when a worker starts employment partway through a pay reference period, there will be zero qualifying earnings for the first part of that period, before the start date. And in such cases where payment is in arrears, there may be zero qualifying earnings payable in the worker’s entire first pay reference period.

In such cases, employers are required to pro-rata workers contribution calculations based on the number of days within the pay reference period for which they were eligible. Most payroll professionals prefer to avoid the tricky pro-rating of any element of pay. The judicious use of postponement rules can really help employers avoid such situations by postponing to at least the end of the current pay reference period, ensuring that employers only need to perform full-period contribution calculations.

Register for one of our free Auto-Enrolment Seminars to learn more about the auto-enrolment legislation and put your questions to our experts.

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