Have you ever looked at your payslip and seen the part of your earnings allocated to your pension ? It’s one of the wisest choices you can make for your future self, but it’s perfectly reasonable to wonder, “How is that amount calculated?”
Grasping how your pension contribution works is a significant move towards managing your financial future. The great news is, it’s often much easier than it seems.
In the UK, the way your contribution is calculated primarily hinges on the type of pension scheme you belong to. Let’s explore the two most prevalent types in a friendly manner.
1. Workplace & Private Pensions (Defined Contribution)
This represents the most prevalent form of pension currently, in which both you and your employer make contributions to your individual pension fund. The computation is generally determined by a percentage of your “qualifying earnings.”
What are “qualifying earnings”?
For the 2024/2025 tax year, this is a specific slice of your annual salary between £6,240 and £50,270. Your contributions are calculated on what you earn between these two figures, not your entire salary.
Under auto-enrolment rules, the current minimums are:
- You contribute: 5% of your qualifying earnings.
- Your employer contributes: 3% of your qualifying earnings.
Many employers are more generous, but this 8% total is the legal minimum.
Let’s see a quick example:
- Sarah earns £30,000 a year.
- Her qualifying earnings are £30,000 – £6,240 = £23,760.
- Her 5% contribution: 5% of £23,760 = £1,188 per year (or £99 per month).
- Her employer’s 3% contribution: 3% of £23,760 = £712.80 per year (or £59.40 per month).
So, a total of £1,900.80 goes into her pension pot that year!
2. Public Sector Pensions (Defined Benefit)
If you work in the public sector (like the NHS, for teachers, or in the civil service), you’re likely in a “defined benefit” scheme. Here, the calculation is a bit different.
Instead of being based on a slice of your earnings, your contribution is a fixed percentage of your entire pensionable salary. This percentage is set by the scheme and is usually tiered—the more you earn, the higher your contribution percentage is.
Example (using hypothetical tiers):
- An NHS nurse earning £35,000 might fall into a tier where the contribution rate is 9.8%.
- Their contribution: 9.8% of £35,000 = £3,430 per year (or £285.83 per month).
Your employer also makes a significant contribution (often around 20% or more!) to fund the scheme. You can find the exact contribution tiers for your specific scheme on its official website.
The Magic of Tax Relief
Here’s the most advantageous aspect! For every contribution you make from your net salary, the government provides a top-up through tax relief. For those in the basic tax rate bracket, this implies that if you wish to contribute £100, you only need to contribute £80, with the government supplementing the remaining £20. It’s akin to receiving an immediate, guaranteed return on your investment!
The simplest method to ascertain your exact contributions is to review your payslip. It will detail your contribution for that pay period, offering you a clear understanding of how you are progressively enhancing your future, one payday at a time.