What Is Pensionable Pay?

At Towerstone, we specialise in higher rate pension tax relief advice and have written this article for employees reviewing payslips. The purpose of this article is to explain what earnings count towards pensions, helping you make informed decisions.

Pensionable pay is one of those phrases that sounds technical and distant until it directly affects your money. In my experience, most people assume it simply means their salary. That assumption is often wrong and sometimes very expensive.

I regularly speak to employees who are shocked to discover that their pension contributions are based on a much lower figure than they expected. I also see employers who think they are being generous, only to find they are meeting the legal minimum rather than what staff assumed was promised. The gap between expectation and reality almost always comes down to misunderstanding pensionable pay.

In this guide, I will explain exactly what pensionable pay means in the UK, how it is calculated, why it varies between schemes, and how it affects both employee and employer contributions. I will also share what I see most often in practice and what I think people should check now rather than years down the line when it is too late to change outcomes.

The Simple Definition of Pensionable Pay

At its most basic level, pensionable pay is the portion of your earnings that is used to calculate pension contributions.

It is not always your full salary.
It is not always the amount on your payslip marked “gross pay”.
It is not always consistent from one employer to another.

Pensionable pay is defined by the pension scheme rules, subject to minimum legal requirements.

That last point is critical.

Why Pensionable Pay Matters So Much

Pension contributions are usually expressed as a percentage.

For example:

Employee contribution 5 percent

Employer contribution 3 percent

Those percentages sound reasonable. But the real question is 5 percent and 3 percent of what?

If your pensionable pay is £20,000 instead of £35,000, the difference over a working lifetime can be enormous.

From experience, pension outcomes are shaped more by pensionable pay definitions than by headline contribution percentages.

Pensionable Pay and Workplace Pensions

In the UK, most employees are members of a workplace pension scheme.

These schemes fall under the automatic enrolment framework overseen by HM Revenue & Customs and The Pensions Regulator.

Automatic enrolment sets minimum standards, not best practice.

Understanding this distinction explains why pensionable pay is often lower than people expect.

Qualifying Earnings Under Auto Enrolment

For automatic enrolment, the legal minimum contributions are based on something called qualifying earnings.

Qualifying earnings are not the same as total pay.

They are earnings between a lower and upper threshold.

For the current framework, qualifying earnings broadly include:

Salary or wages

Overtime

Bonuses

Commission

Statutory sick pay

Statutory maternity or paternity pay

But only the portion of earnings between the lower and upper limits counts.

This means:

The first slice of your pay does not count

Pay above the upper limit does not count

From experience, this is where many people feel misled, even though employers are following the law.

An Example of Qualifying Earnings in Practice

Let’s look at a simple example.

Salary £30,000

Lower qualifying earnings limit £6,240

Upper qualifying earnings limit £50,270

Your pensionable pay under qualifying earnings would be:

£30,000 minus £6,240 = £23,760

Contributions are calculated on £23,760, not £30,000.

If total contributions are 8 percent:

8 percent of £23,760 = £1,900.80 per year

Many employees assume contributions are based on the full £30,000. They are not.

In my opinion, this single misunderstanding causes more disappointment than almost anything else in workplace pensions.

Pensionable Pay Can Be Defined More Generously

It is important to say this clearly.

Employers can choose to define pensionable pay more generously than qualifying earnings.

Common alternatives include:

Basic salary only

Basic salary plus fixed allowances

Total earnings including overtime and bonuses

Full gross pay

Some employers base pension contributions on full salary, even though they are not required to do so.

From experience, employers who do this tend to have better staff retention and fewer disputes later.

Basic Salary Only Schemes

Some pension schemes define pensionable pay as basic salary only.

This means:

Overtime does not count

Bonuses do not count

Commission does not count

If you earn a significant portion of your income through variable pay, this can drastically reduce pension contributions.

In my opinion, basic salary only schemes are one of the least understood pension arrangements among employees.

Including Overtime and Bonuses

Other schemes include:

Guaranteed overtime

Non guaranteed overtime

Regular bonuses

Commission

Whether these are pensionable depends entirely on the scheme rules and your employment contract.

From experience, two employees earning the same total pay can receive very different pension contributions simply because one earns more through bonuses.

Pensionable Pay in Defined Contribution Schemes

Most modern workplace pensions are defined contribution schemes.

In these schemes:

Contributions are calculated using pensionable pay

The amount paid in determines how much builds up over time

If pensionable pay is narrowly defined, the pension pot grows more slowly.

This is why pensionable pay matters far more in defined contribution schemes than people initially realise.

Pensionable Pay in Defined Benefit Schemes

Defined benefit schemes work differently.

Instead of a pot, they promise a pension based on salary and service.

In these schemes, pensionable pay usually means:

Pensionable salary used in benefit calculations

This may be:

Final salary

Career average salary

In defined benefit schemes, pensionable pay affects:

The pension you accrue each year

The pension payable at retirement

From experience, misunderstandings here can lead to incorrect retirement expectations.

Career Average Versus Final Salary

In career average schemes:

Pensionable pay is tracked each year

Benefits are built up annually

Earlier years are often revalued

In final salary schemes:

Pensionable pay near retirement matters most

In both cases, pensionable pay is defined by scheme rules, not assumptions.

Allowances and Pensionable Pay

Many employees receive allowances.

Examples include:

Car allowances

Location allowances

Shift allowances

On call payments

Whether these are pensionable varies.

Some schemes include them. Many do not.

From experience, allowances are one of the most commonly excluded forms of pay, often without employees realising.

Salary Sacrifice and Pensionable Pay

Salary sacrifice arrangements add another layer of complexity.

Under salary sacrifice:

You agree to reduce your salary

The employer pays extra pension contributions

This can be very tax efficient.

However, pensionable pay may be defined as:

Pre sacrifice salary

Or post sacrifice salary

This matters for:

Future pay rises

Life assurance benefits

Overtime calculations

Some defined benefit schemes

In my opinion, salary sacrifice should always be reviewed alongside pensionable pay definitions, not in isolation.

Why Employers Choose Different Definitions

From experience, employers choose pensionable pay definitions based on:

Cost control

Simplicity

Industry norms

Legacy arrangements

Recruitment and retention strategy

Automatic enrolment set a minimum standard. Many employers stopped there.

That does not make them wrong, but it does mean employees need to understand what is actually being contributed.

Where to Find Your Pensionable Pay Definition

You should not guess this.

Pensionable pay is defined in:

Your employment contract

The pension scheme booklet

The scheme rules

Sometimes your staff handbook

Payslips often show pension contributions but do not explain how pensionable pay is defined.

From experience, asking HR or payroll directly is often the quickest way to get clarity.

Common Misunderstandings I See

From experience, the most common misunderstandings include:

Assuming pensionable pay means full salary

Thinking all overtime is pensionable

Believing bonuses always count

Confusing qualifying earnings with gross pay

Assuming higher contributions mean better pensionable pay

Never checking scheme rules at all

Most people only discover the truth when they do a pension forecast and feel disappointed.

Why This Matters Long Term

Pension contributions compound over time.

A small difference in pensionable pay early in your career can translate into a very large difference at retirement.

For example:

£3,000 per year excluded from pensionable pay

30 year career

Employer and employee contributions combined at 8 percent

Investment growth over decades

The lost value can easily run into tens of thousands of pounds.

In my opinion, pensionable pay is one of the most underrated factors in retirement planning.

Can Pensionable Pay Be Changed?

Sometimes yes, sometimes no.

Changes may happen if:

The employer improves the scheme

You are promoted or change role

You negotiate as part of a pay review

You move employer

Employees rarely have power to change scheme rules individually, but understanding them helps you plan elsewhere if needed.

What I Advise People to Do Now

Based on years of experience, my advice is simple but often ignored:

Find out exactly what your pensionable pay is

Check whether it includes bonuses and overtime

Understand whether salary sacrifice affects it

Compare contributions to full salary

Adjust personal contributions if needed

Review this after promotions or job changes

In my opinion, five minutes of clarity now beats decades of assumptions.

My Honest View From Experience

Pensionable pay is not designed to trick people, but it is rarely explained clearly.

From experience, disappointment around pensions usually comes from misunderstanding rather than poor investment returns.

Once people understand pensionable pay, they can make informed decisions, either by increasing personal contributions or planning additional savings.

Ignoring it does not make the impact disappear.

Where this leaves you

So what is pensionable pay?

It is the portion of your earnings used to calculate pension contributions, defined by your pension scheme rules, and often lower than people expect.

It may be based on qualifying earnings, basic salary, or full pay. The difference matters.

From experience, understanding pensionable pay is one of the most important steps you can take in controlling your retirement outcome.

Your pension is built quietly over decades. Pensionable pay determines how strong that foundation really is.

If you would like to explore related pension guidance, you may find what is the average uk pension pot and what is the lifetime allowance pension useful. For broader pension guidance, visit our pensions knowledge hub.