In the UK, all employers must provide an occupational pension scheme. This is called 'automatic enrolment'. Yet, there are several types of pension schemes that you can offer. We'll help you understand the differences between each.
Banded earnings
Banded earnings
This is Kota's default pension scheme type for UK employees. Employer and employee contributions will be calculated off the earnings between a specific threshold (currently between £6,240 and £50,270 - see here). You should make sure your payroll application can make these calculations or use our software to do the calculations and add the amounts back into your payroll application.
Unbanded earnings
Unbanded earnings
Also known as Gross Qualifying Earnings. Employer and employee contributions will be calculated off the full amount of pay that the employee typically sees on their payslip. This includes:
salary
bonuses
commission
overtime
SSP
SMP
Please note that not all items of pay can be included when calculating pension contributions. Items such as expenses or travel money should be excluded.
Advanced options
Advanced options
Even though most employers choose one of the two options above, there are other more complex possibilities. These options may require you to complete Self-Certification, so we strongly encourage you to investigate this topic or seek guidance from an adviser before continuing. Be aware that if you select the first or second options below you will need to assess and calculate contributions within your payroll application. The Smart Pension assessment tool only supports the third option.
Basic Pay
This is a definition of pensionable earnings at least equal to basic pay that includes Salary / Wages, holiday pay as well any statutory payments (such as SMP, SPP, SSP). This definition allows the employer to exclude certain components of pay such as bonuses, overtime, commission and certain allowances.
Calculate contributions on at least 85% of total pay
This is a definition of pensionable earnings whereby the employer certifies to ensure and monitor that at least 85% of total earnings are marked as pensionable in the calculation of contributions.
Calculate contributions on total pay
This is a definition of pensionable earnings where the employer calculates contributions on total earnings.
If it's helpful, here's a practical example taken from the contributions table in the Smart Pension account where calculations for Banded and Unbanded Earnings are compared.
Banded Earnings Vs. Unbanded Earnings calculation
Banded Earnings Vs. Unbanded Earnings calculation
Mr Banded has Gross Qualifying Earnings (GQE) of £2,500 a month. His pension scheme is set up to use banded earnings, which means salary thresholds for monthly pay reduce this amount to £1,980. This amount is called Pensionable Earnings (PE). His employee and employer contributions are then based on his Pensionable Earnings. This means his total contributions for this pay period are £158.40.
Mr Unbanded has Gross Qualifying Earnings (GQE) of £2,500 a month. As the scheme is set to use unbanded earnings, salary thresholds are not applied to his GQE and his PE is the same amount. His employee and employer contributions for this pay period are £200.