Workplace pension contributions might seem straightforward on the surface – an employer pays in, an employee pays in, and the pension pot grows. But the mechanics of how those contributions are calculated are more nuanced than many payroll teams, and most employees realise.
Understanding the contribution tiers and the thresholds that underpin them is not just good practice. It is a compliance essential.
Auto-enrolment
Since its phased introduction in 2012, auto-enrolment has transformed workplace pension participation in the UK. By the end of 2023, over 11 million workers had been automatically enrolled, and the policy is widely considered one of the most significant shifts in retirement saving in a generation.
Under auto-enrolment, eligible workers are enrolled into a workplace pension scheme without having to opt in. Both the employer and the employee make contributions, and the government tops up the employee’s share through tax relief.
Eligibility is determined by age and earnings. Workers aged between 22 and state pension age who earn above the earnings trigger, currently £10,000 per year, must be automatically enrolled. Workers who earn below this threshold, or who fall outside the age range, are not eligible for auto-enrolment but may be able to opt in voluntarily.
Qualifying earnings – the default calculation basis
Once a worker is enrolled, the contribution calculation does not apply to their full salary. Under the default method, known as qualifying earnings, it applies to a defined band, and this is where many employers get caught out.
There are three thresholds to know.
- The earnings trigger (currently £10,000 per year) determines who gets enrolled. If an employee earns above this, auto-enrolment applies.
- The lower earnings limit (currently £6,240 per year) marks the bottom of the band on which contributions are actually calculated.
Earnings below this figure are excluded from the calculation entirely. - The upper earnings limit (currently £50,270 per year) marks the top of the band. Earnings above this are not subject to mandatory contributions, though employers and employees can choose to contribute beyond this point.
The stretch between £6,240 and £50,270 is qualifying earnings. Pension contributions are calculated on this band only, not on an employee’s total gross pay.
Under qualifying earnings, the minimum total contribution is 8%, split between a minimum of 3% from the employer and 5% from the employee.
The certification alternative – Sets 1, 2 and 3
Qualifying earnings are not the only way to structure pension contributions. Employers whose schemes are based on a different definition of pensionable pay – basic salary only, or total gross pay- can use an alternative approach known as certification.
Certification allows employers to self-certify to The Pensions Regulator that their scheme meets one of three defined tests, each with its own contribution requirements. Rather than calculating contributions on the qualifying earnings band, contributions are applied to the earnings definition the employer has chosen. In return, the minimum contribution rates are adjusted accordingly.
There are three sets.
Set 1
Set 1 uses basic salary as the pensionable earnings definition and requires a minimum total contribution of 9%, with the employer contributing at least 4%.
Because basic salary typically excludes variable elements like overtime, bonuses and commission, the higher contribution percentages are designed to compensate for the narrower earnings base.
Set 2
Set 2 also uses basic salary only, with a minimum total contribution of 8% and a minimum employer contribution of 3%. However, this set comes with an important condition – the pensionable salary used must represent at least 85% of each employee’s total gross salary, assessed on an aggregate basis across the scheme year.
This safeguard ensures that the basic salary definition cannot be used to exclude so much pay that employees end up meaningfully under-contributed compared to what they would receive under qualifying earnings.
Set 3
Set 3 takes the broadest approach, treating total gross pay as pensionable – everything the employee earns is included in the calculation. Because the earnings base is wider, the minimum total contribution is lower at 7%, with the employer contributing at least 3%.
It is worth noting that under all three sets, just as with qualifying earnings, employer and employee contributions can be structured flexibly. An employer contributing above the minimum reduces the employee’s required share, as long as the total minimum is met.
Qualifying earnings versus certification – which applies?
The qualifying earnings method is the statutory default. Unless an employer has actively chosen and certified under Set 1, 2 or 3, qualifying earnings apply. Where an employer has made that choice, they must formally certify that their scheme satisfies the relevant test, and that certification must be renewed every 18 months.
Choosing the right basis matters, both for compliance and for cost. Set 2’s 85% aggregate test in particular requires careful monitoring, especially in workforces with variable or seasonal pay, where the ratio of basic salary to total gross earnings can shift across the year. If the 85% threshold is not maintained, the scheme may no longer satisfy the Set 2 conditions, and a recalculation could be required.
What this looks like in practice
Under qualifying earnings
Their contributions are not based on £28,000 – they are based on £21,760 (£28,000 minus the £6,240 lower earnings limit).
At the 8% minimum, that is a total contribution of £1,740.80, split as £652.80 from the employer and £1,088 from the employee.
Under Set 3
That same employee’s contributions are calculated on their full £28,000. At the 7% minimum, the total contribution is £1,960. Despite the lower percentage, the broader earnings base can produce a higher absolute contribution, which is why the rates differ across the sets.
The right comparison for any employer depends on their payroll structure, the composition of employee earnings and the scheme already in place.
Thresholds for 2026/27
Following the annual statutory review, all qualifying earnings thresholds have been maintained at existing levels for 2026/27.
- The earnings trigger remains at £10,000
- The lower earnings limit at £6,240
- The upper earnings limit at £50,270
For payroll, the proportional monthly and weekly figures are £520 and £120 at the lower end, and £4,189 and £967 at the upper end.
What payroll teams need to get right
Whichever basis applies, qualifying earnings or one of the certification sets, accurate contribution calculations are a legal requirement.
For variable pay, contributions need to be assessed at each pay period rather than averaged.
For certification schemes, the definition of pensionable pay must be applied consistently, and for Set 2 in particular, the 85% aggregate test needs to be tracked across the scheme year rather than just assessed at individual pay runs.
Errors, whether underpayments to the pension provider or incorrect employee deductions, can attract scrutiny from The Pensions Regulator, and employers carry the responsibility for ensuring everything is right.
Future changes
The Pensions (Extension of Automatic Enrolment) Act 2023 legislated for two future changes:
- Lowering the minimum auto-enrolment age from 22 to 18
- Removing the lower earnings limit so that contributions under qualifying earnings are calculated from the first pound of earnings.
Neither has been implemented yet, and the government has indicated it will consider the timing carefully, given the cost impact for both employers and employees. When the lower earnings limit is eventually removed, the payroll and cost implications will be significant, particularly for lower-paid workforces.
Pensions and payroll – closer than they might appear
Whether your scheme runs on qualifying earnings, Set 1, Set 2 or Set 3, the accuracy of every pension contribution calculation flows directly through your payroll. Getting the basis right, applying it consistently and keeping pace with regulatory change is what separates compliant pension administration from costly mistakes.
If you want to review how pension contributions are currently being calculated in your payroll, or you are unsure whether your certification basis is still appropriate for your workforce, the Ascend team is here to help.
