To calculate a pension contribution in the UK, take your scheme's percentage of the pay it counts; which pay counts, such as overtime, bonuses or redundancy pay, depends on the scheme.

Two things decide the figure: the percentage and the slice of pay it is applied to. Most people know the first and have never been told the second. With your payslip and scheme booklet nearby, you can put the sums to an FCA-authorised adviser; completing this page's form is what sets up that free call.

How to calculate a pension contribution from your salary

Multiply the pay your scheme counts by the contribution rate. If you were automatically enrolled, GOV.UK says you and your employer must each pay a percentage of your earnings, and that how much you pay and what counts as earnings depend on the scheme your employer has chosen.

The legal minimum for automatic enrolment is a total of 8%, of which at least 3% must come from the employer. GOV.UK's table shows the other 5% coming from you, but says that in some schemes you can pay in less as long as your employer puts in enough to meet the total minimum. For most automatic enrolment schemes it is applied to a band of pay: GOV.UK says contributions are based on your total earnings between £6,240 and £50,270 a year before tax. Here is a worked example, using a made-up salary:

  • Pay over a year: £30,000, with nothing else counted.
  • Pay in the band: £30,000 - £6,240 = £23,760.
  • Your 5%: £23,760 x 5% = £1,188 a year. Part of this can be tax relief: in GOV.UK's own example you put in £40, tax relief adds £10 and your employer puts in £30.
  • Employer's 3%: £23,760 x 3% = £712.80 a year.

This is only an illustration of the arithmetic at the minimum rates. Many schemes use a different base or pay more than the minimum, and the rate for a public-sector scheme is a different calculation; for the Local Government Pension Scheme see its contribution bands. The minimums themselves are set out in the workplace pension minimum guide.

Which pay counts: basic pay, overtime and bonuses

It depends which of two measures your scheme uses. Under the Pensions Act 2008, "qualifying earnings" are the part of gross earnings in the band that comes from "salary, wages, commission, bonuses and overtime", plus statutory sick, maternity, paternity, adoption, shared parental, parental bereavement and neonatal care pay. On that measure overtime and bonuses are in.

Many schemes do not use that measure. The Pensions Regulator's guidance says existing defined contribution schemes base contributions on percentage rates of pensionable pay, that the scheme's definition "is likely to be different to qualifying earnings", and that pensionable pay "may just include basic pay and not overtime or bonuses". It also says contributions may be deducted from the first pound earned. So two colleagues on the same salary can pay different amounts depending on the scheme their employer runs.

The employer decides the details: the regulator says whether a component of pay is an element of qualifying earnings is for the employer to assess. The scheme booklet or your HR team will say which definition applies to you, and your payslip may show the pay figure the percentage was taken from.

Is pension calculated on holiday pay?

Holiday pay is not named as a separate item in the Act's list of earnings, and for the legal minimum the regulator leaves it to the employer to assess whether a component of pay counts. A scheme that uses its own pensionable pay sets its own rule. The Local Government Pension Scheme gives an example of how one scheme draws the line: its member glossary lists normal salary or wages, bonuses, overtime and shift allowance as pensionable, and says you do not pay contributions on "pay in consideration of loss of holidays", which is pay for holiday you have lost, not the normal salary or wages that head its list of pensionable pay.

That is one scheme's rule, not a general rule; do not assume yours matches it. If your scheme wording is unclear, raise it on the free call-back that the form on this page arranges, and the adviser can explain it.

Redundancy pay and pay in lieu of notice

Redundancy pay is not named in the Act's list of earnings. The LGPS glossary, again as one example, says members do not pay contributions on "pay in lieu of notice" or on "pay relating to loss of future pensionable payments or benefits". A scheme can define pensionable pay differently, so the booklet for your own scheme is the place to check.

If you are paying into a pension yourself while made redundant, a different test applies. HMRC's Pensions Tax Manual explains how the earnings limit on tax relief works. It says the part of a redundancy payment above the £30,000 threshold counts as employment income, while the first £30,000 does not. It also warns that care is needed "not to confuse usual wages or pay, pay in lieu of notice or holiday pay, with the redundancy payment when such elements are bundled into a final payment." Whether your employer's own contribution is also due on a bundled final payment is a scheme question; fill in the form here if you want an adviser to explain how that is usually approached.

Gross or after tax?

Qualifying earnings are measured on gross pay, before tax, as the Act puts it: "the gross earnings payable to that person". If you use salary sacrifice, though, your pay is lower before the calculation starts: the regulator says that for a defined contribution scheme the qualifying earnings used to meet the minimum are the post-sacrifice level of salary. The salary sacrifice guide explains the trade-off and how to tell whether you are in one.

When your pay changes month to month

The legal test is applied over a pay reference period, whose length the regulator ties to the usual interval between payments of your regular wage or salary, such as four weeks. The £6,240 and £50,270 limits are scaled up or down to match the length of that period. In the regulator's worked example, the employer adds overtime to basic pay, because qualifying earnings include both.

Pay during leave is covered separately: see sick pay and other leave and maternity leave.

Paying in yourself: the limit is your earnings

If you pay into a personal pension or SIPP yourself, GOV.UK gives two separate limits: tax relief on no more than 100% of your earnings in a year, and an annual allowance, £60,000 this tax year, above which you pay tax. HMRC's manual lists what counts as earnings for that limit, including pay, bonus, overtime and commission; whether dividends or rental income count has its own page, and the pension tax relief guide covers the relief itself. Values in a SIPP and other investments can fall as well as rise, so you may get back less than you paid in.

Questions people ask about the maths

Is a pension calculated on gross salary?

Under the Pensions Act 2008 the starting point is gross earnings, before tax, between £6,240 and £50,270 a year. Your own scheme may use total pay or basic pay, and salary sacrifice lowers the figure first.

Do employers pay pension contributions on overtime?

Overtime is part of qualifying earnings in the Act, but a scheme that uses its own pensionable pay may leave it out. The scheme rules or your employer will say.

Is a bonus pensionable?

Bonuses are on the Act's list of earnings. A scheme whose pensionable pay is basic pay only may not take contributions from one, so check the booklet before you assume.

How is a 5% pension contribution calculated?

Multiply the pay your scheme counts by 0.05. On the band example above, £23,760 gives £1,188 a year; on a scheme that uses the whole salary, the same percentage applies to the whole £30,000.

Do part-time workers get employer contributions?

Less pay means a smaller contribution, and on the legal minimum nothing is due on pay below £6,240 a year. For someone who opted in, the GOV.UK threshold for an employer contribution is pay above £520 a month (£120 a week); at or below it, the employer need not pay anything. Whether you are enrolled at all is a separate question, covered in the guide for part-time and zero hours workers.

Where can I find which pay counts for me?

Your scheme booklet, the HR or payroll team, or the provider will have the definition of pensionable pay. To check your own sums, GOV.UK points to MoneyHelper's contributions calculator.

Getting your own figure checked

Arithmetic is the easy part. The answer for your payslip turns on your scheme's definition and on your pay mix. Where overtime, bonuses or a leaving payment form a big part of your pay, a free call-back after the form here means your payslip can be read by an FCA-authorised adviser beside your other pensions.

For the wider picture, read the SIPP guide, and the workplace pension rules and paying more into a workplace pension.

Sources