Auto Enrolment Pension Deductions: Why Getting It Wrong Can Cost You Dearly

Since the introduction of auto enrolment in the UK, employers have been legally obliged to assess their workforce and automatically enrol eligible employees into a qualifying workplace pension scheme. But for payroll professionals and business owners alike, one key area continues to trip people up, getting the pensionable pay right.

And the consequences of getting it wrong? Fines, back payments, reputational damage, and stressed employees asking tough questions.

Let’s explore why pensionable pay calculations aren’t as simple as they sound, and why accuracy matters more than ever.

What Exactly Is Pensionable Pay?

You’d think there would be a universal definition. But no, under auto enrolment, pensionable pay can vary depending on the scheme certification chosen by the employer.

There are three common approaches:

1. Qualifying Earnings: Earnings between a lower and upper limit (e.g., £6,240 to £50,270 for 2024/25), including wages, bonuses, statutory pay, commission, and overtime.

2. Total Earnings: All pay elements from £1 up—great for simplicity but requires higher employer contributions.

3. Custom or Basic Pay Definitions (Certified Schemes): Only specific elements like base salary may be used, but contributions must meet higher minimum thresholds to remain compliant.

Each of these choices has implications for:

• How contributions are calculated

• What pay elements are included

• Employee expectations

• Legal compliance

The Risks of Miscalculating Pension Deductions

When pensionable pay is calculated incorrectly, you don’t just get a spreadsheet with the wrong numbers, you create a compliance time bomb.

❌ Under-Deducting from Employees

You risk:

• Non-compliance with The Pensions Regulator (TPR)

• Fines or enforcement action

• The need to backdate and repay missed contributions

❌ Over-Deducting from Employees

You risk:

• Employees being out of pocket unfairly

• Breach of trust and poor morale

• Possible breach of contract or complaints

❌ Mismatched Contributions

• If employer and employee contributions are out of sync, this can trigger alerts with the pension provider or even result in scheme rejection.

• Failed uploads to the pension portal can delay processing and lead to errors being multiplied each pay period.

Business Implications

Inaccurate auto enrolment calculations lead to real operational headaches:

• Correcting historical data is costly and time-consuming.

• Payroll and pension provider reconciliation becomes a nightmare.

• Lost staff confidence in the business’s handling of finances.

• Increased workload for HR, payroll, and finance teams.

And let’s not forget the reputational cost, employees expect their pension contributions to be accurate. When mistakes happen, it affects long-term trust.

Why It’s So Easy to Get Wrong

• Not understanding which earnings are included under the chosen scheme

• Applying thresholds incorrectly (e.g. forgetting the lower earnings limit for qualifying earnings)

• Using outdated or non-certified definitions

• Incorrectly handling variable pay such as commission or bonuses

• Failing to adjust calculations when employees change working hours, job roles, or reach different earnings thresholds

What You Can Do

1. Review your pension scheme definition: Do you know what earnings are included?

2. Regularly audit your payroll system: Are the correct pay codes flagged as pensionable?

3. Train your payroll team: This is not just admin; it’s legal compliance.

4. Communicate clearly with employees: So they understand what’s being deducted and why.

5. Get expert help if needed: A small investment now avoids big costs later.

Final Thought

Auto enrolment isn’t going away, and nor is the complexity around pensionable pay. But getting it right is more than just ticking a box.

It’s about:

• Protecting your employees’ futures

• Demonstrating operational integrity

• Safeguarding your business from unnecessary risk

In short, getting pension deductions wrong can cost you money, trust, and reputation. But getting them right? That’s payroll done properly, and professionally.