How do I calculate contributions? AE FAQs

Article ID
12102
Article Name
How do I calculate contributions? AE FAQs
Created Date
1st May 2019
Product
IRIS Payroll Business, IRIS Bureau Payroll, IRIS GP Payroll, IRIS Payroll Professional, IRIS Earnie IQ
Problem

How are pension contributions calculated?

AE Banded Calculation.

Resolution

The pension contribution is calculated as a percentage of earnings between the qualifying earnings lower threshold and the qualifying earnings upper threshold.

The earnings used for the calculation are the pay elements selected as “Qualifying Earnings” in step 7 of the Auto Enrolment Configuration Tool.

Click here for more details on “Step 7 – Define the pay elements for Qualifying and Pensionable Earnings”

The calculation then follows:

• Take the total of the pay elements marked as “Qualifying Earnings
• Subtract the “Lower Earnings Limit” (£512 per month as per 2019/20 tax year)
• If applicable, subtract any earnings over the “Upper Earnings Limit” (£4167 per month as per 2019/20 tax year)
• Calculate the percentage contribution on the remaining earnings.
• If you are applying “Basic Rate Tax Relief” (common with many AE pension funds) the actual contribution value will be reduced by 20%. eg. a 5% contribution will actually deduct 4% from the employee with the remaining 1% claimed as tax relief through the pension provider.

Examples

Example 1

Monthly paid employee gets a salary of £2000 in month 5 and bonus of £500. The employee’s contribution rate is 5%. The bonus has NOT been ticked as qualifying. His pension is calculated as follows:-
Salary: £2000.00
Bonus: £500.00
Total Gross Pay: £2500.00
Qualifying Earnings £2000.00
Qualifying Earnings Lower Threshold (monthly 2019/2020): £512.00
Qualifying Earnings Upper Threshold (monthly 2019/2020): £4167.00
Earnings on which pension calculated: 2000.00 – 512.00 = 1488.00
Pension contribution: 1488.00 * 5% = £74.40

Example 2
Monthly paid employee gets a salary of £2000 in month 5 and a bonus of £500. The employee’s contribution rate is 5%. The bonus HAS been ticked as qualifying. His pension is calculated as follows:-
Salary: £2000.00
Bonus: £500.00
Total Gross Pay: £2500.00
Qualifying Earnings £2500.00
Qualifying Earnings Lower Threshold (monthly 2019/2019): £512.00
Qualifying Earnings Upper Threshold (monthly 2018/2019): £4167.00
Earnings on which pension calculated: 2500.00 – 512.00 = £1988.00
Pension contribution: £1988.00 * 5% = £99.40

Example 3

Where an employee earns over the Qualifying Earnings Upper Threshold, the calculation would be:-
Salary: £4000.00
Total Gross Pay: £4000.00
Qualifying Earnings: £4000.00
Qualifying Earnings Lower Threshold (monthly 2019/2019): £512.00
Qualifying Earnings Upper Threshold (monthly 2018/2019): £4167.00
Earnings on which pension calculated: £4167.00 (Earning over Qualifying Earnings Upper Threshold ignored) – £512.00 = £3655.00
Pension contribution: £3360.00 * 5% = £182.75

Example 4

As above, but applying basic rate tax relief:
Salary: £4000.00
Total Gross Pay: £4000.00
Qualifying Earnings £4000.00
Qualifying Earnings Lower Threshold (monthly 2019/2019): £512.00
Qualifying Earnings Upper Threshold (monthly 2018/2019): £4167.00
Earnings on which pension calculated: £4167.00 (Earning over Qualifying Earnings Upper Threshold ignored) – £512.00 = £3655.00
Pension contribution: £3655.00 * 5% = £182.75
Reduce by 20% for tax relief, 20% of £182.75 = £36.55.
£182.75 – £36.55 = £146.20 deduction from the employee pay. £36.55 will be claimed as tax relief and added to the pension fund by the pension provider.