How UK pension contributions work in payroll
Reviewed by Mellow Editorial Team, HR & payroll content team
Pension contributions in UK payroll run through a system called auto-enrolment, which requires most employers to enrol eligible workers into a qualifying workplace pension scheme and make minimum contributions on their behalf.
Who must be enrolled
You must automatically enrol any worker who:
- is aged between 22 and state pension age
- earns above the earnings trigger (check The Pensions Regulator for the current threshold, as this is reviewed annually)
- ordinarily works in the UK
Workers below the age threshold, below the earnings trigger, or who are self-employed fall outside automatic enrolment, though some have the right to opt in. Workers can also choose to opt out after being enrolled — if they do, you must refund any contributions they have made within that opt-out window.
The minimum contribution rates
The legal minimums are set as a percentage of qualifying earnings, not total pay. Qualifying earnings are the portion of a worker's pay that falls within a band set by The Pensions Regulator — this excludes earnings below the lower threshold and above the upper threshold of that band.
On qualifying earnings, the split is:
- Employer minimum: 3%
- Employee minimum: 5%
- Total minimum: 8%
You can contribute more than 3% as an employer. If you do, the employee's required contribution reduces accordingly, provided the total still reaches 8% and your scheme rules permit it. Many employers choose to offer higher employer contributions as part of their benefits package.
How contributions move through payroll
Each pay period, your payroll calculation works through the following steps.
1. Calculate qualifying earnings. Identify the portion of the employee's gross pay that falls within the qualifying earnings band for that pay period. For a monthly-paid employee, the annual band thresholds are divided by twelve.
2. Apply the percentages. Multiply qualifying earnings by 5% to get the employee contribution, and by 3% to get the employer contribution.
3. Deduct the employee contribution from gross pay. The employee's 5% comes out of their pay before it reaches them. Whether it is deducted before or after income tax depends on the pension scheme's tax relief method — relief at source or net pay arrangement (see below).
4. Record the employer contribution separately. The employer's 3% is a cost on top of the employee's gross pay. It does not appear as a deduction on the payslip; it is a separate outgoing for the business.
5. Pay contributions to the pension provider. You collect both contributions and pay them across to the pension provider, usually within a set number of days after payday. Missing this deadline is a compliance breach.
Tax relief: net pay vs relief at source
The method your pension scheme uses affects how employee contributions interact with income tax.
Net pay arrangement: contributions are deducted from gross pay before income tax is calculated. The employee gets tax relief immediately because their taxable income is reduced. This works straightforwardly for employees paying the basic rate (20%), higher rate (40%), or additional rate (45%).
Relief at source: contributions are deducted from net (after-tax) pay. The pension provider then claims basic-rate tax relief (20%) from HMRC and adds it to the pension pot. Higher and additional-rate taxpayers need to claim the extra relief themselves through self-assessment.
As an employer, you do not choose the method arbitrarily — it is determined by which type of scheme you use. You do need to know which method applies so you can set up payroll calculations correctly.
Reporting and record-keeping
Pension contributions sit alongside your wider payroll reporting obligations. You submit pay and deduction data to HMRC under Real Time Information (RTI) via a Full Payment Submission (FPS) on or before each payday. Pension contributions themselves are reported to your pension provider on their own schedule, but the underlying payroll data feeding those figures must be accurate and timely.
You are also required to keep records of enrolment, opt-outs, and contribution calculations, and to re-enrol eligible workers who have opted out roughly every three years. The Pensions Regulator can issue fixed and escalating penalty notices for non-compliance, so a clear internal process — or a payroll provider that handles this automatically — matters.
If you use an employer of record or run payroll across multiple countries on one platform, ensure the pension administration layer is equally joined up, since contribution errors often stem from payroll data that does not flow cleanly into the pension provider's system.
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