Pension contributions are calculated based on each employees qualifying earnings, not their gross pay. Find out what the qualifying earnings thresholds are, how the calculation is made and how tax relief works on workplace pensions.
1. What are Qualifying Earnings?
Qualifying earnings is the amount of gross pay used when it comes to calculating pension contributions for employees on PAYE. The government sets out an upper and lower limit to use, the current qualifying earnings thresholds for 2024/25 are:
| Pay Periods | Lower level of qualifying earnings | Upper level of qualifying earnings | Maximum Pensionable Pay |
|---|---|---|---|
| Weekly | £120 | £967 | £847 |
| Fortnightly | £240 | £1,934 | £1,694 |
| Four weekly | £480 | £3,867 | £3,387 |
| Monthly | £520 | £4,189 | £3,669 |
3. Calculating Tax Relief on Workplace Pensions
There are two ways to calculate tax relief on pensions when running payroll – relief at source or net pay arrangement. It’s the employers choice which one they use but the first one results in tax relief being added to your pension pot and the other results in you getting full tax relief straight away.
3.1 Relief at Source Arrangement
Under relief at source basic rate tax relief (20%) is added to employees pension pots by the pension providers.
| Gross monthly salary | £3,000 |
| Qualifying earnings | £3,000 |
| Qualifying earnings for pension (£3,000 – £520) | £2,480 |
| Pension contribution (employee 5%) | £124.00 |
| Tax relief at 20% claimed by Pension Provider (£124 x 20%) | £24.80 |
| Pension Deduction (£124.00 – £24.80) | £99.20 |
The relief at source arrangement normally benefits employees who do not pay tax on their earnings. But because the pension provider claims tax relief, they only claim this at the standard basic rate of 20% so higher rate taxpayers will need to fill in a tax return or contact HMRC to get their additional tax relief.
3.2 Net Pay Arrangement
Under the net pay arrangement employers calculate qualifying earnings for pensions in the same way as the relief at source method, but employees tax is calculated based on gross pay less pension contribution.
| Gross monthly salary | £3,000 |
| Qualifying earnings | £3,000 |
| Qualifying earnings for pension (£3,000 – £520) | £2,480 |
| Pension contribution (employee 5%) | £124.00 |
With the net pay arrangement, employees benefit from tax relief straight away and don’t need to apply for any additional tax relief if they are higher rate taxpayers because the deduction is made from gross pay and then tax is calculated.