How to set employer pension contributions

Before you start

Legal basis. The Pensions Act 2008 sets qualifying earnings and the DC minimum, and allows certification [2][3][4]. The duty to consult is in SI 2006/349 [5]. Age rules are in the Equality Act 2010 and a 2010 Order on pension schemes [6][7].

Who to involve. Reward, finance, payroll, the pension provider or trustees, your adviser and employment lawyers.

What you need. Each employee's basic and variable pay, date of birth, start date and current rates, plus the scheme rules and contract wording.

Step 1: Confirm the legal floor

For each eligible jobholder in a DC scheme, the employer must pay at least 3% of qualifying earnings, and the total must be at least 8% [3]. The Department for Work and Pensions kept the thresholds unchanged for 2026/27 [8]:

Qualifying earnings include salary, wages, commission, bonuses, overtime, statutory sick pay and statutory family leave pay [2].

This guide covers DC schemes. In the lumi reward benchmark, 89.2% of organisations offer a DC scheme to their main population (n = 269; full findings).

Step 2: Choose the earnings basis

• Qualifying earnings (the band). The minimum test is built in. The first £6,240 and pay above £50,270 attract nothing, which matters most for low and high earners. Cost moves with overtime and bonus.
• Basic pay. Easy to explain and budget. Someone with high variable pay can receive less than on the band. Either check each jobholder against the minimum or certify. Set 1 needs 9% of pensionable pay (4% employer), where pensionable pay is at least basic pay. Set 2 needs 8% (3% employer), where pensionable pay is at least 85% of total earnings across the jobholders covered [4].
• Total pay. Everything counts from the first pound, so it costs most at any rate. Set 3 needs 7% of total earnings (3% employer) [4].

A certificate lasts up to 18 months [4].

Watch, but do not plan around. The Pensions (Extension of Automatic Enrolment) Act 2023 lets the Secretary of State remove the lower qualifying earnings limit and lower the minimum age from 22. Section 1 is not in force and no commencement regulations had been made as at 20 September 2026 [15], so the band and age above still apply. Removing the lower limit would add most cost on a qualifying earnings basis.

In the lumi reward benchmark, 45.3% of organisations calculate contributions on qualifying earnings (common), 38.1% on basic pay (alternative) and 16.6% on total or full pay (rare) (n = 265).

Step 3: Set the employer rate: flat or matched

• Flat rate. One rate for everyone. Predictable cost, but no direct reward for saving more.
• Matching. The employer rate goes up with the employee's rate, to a cap. It rewards saving, but cost depends on take-up, and people who cannot afford more receive less. The lowest point must still meet the legal minimum.
• Core plus match. A fixed core with a match on top. More to explain and administer.

In the lumi reward benchmark, 51.7% of organisations offer no matching (common). Matching up to 3% is offered by 14.1%, over 3% to 5% by 19.3%, over 5% to 8% by 10.0% and over 8% by 4.8% (all rare). Together, 48.2% offer some matching (n = 269).

As an external test, Pensions UK's Pension Quality Mark needs at least 12% of pensionable pay, with at least 6% from the employer [10]. In the lumi reward benchmark, 19.7% of organisations say their scheme meets that threshold (rare) (n = 264).

Step 4: Decide whether to tier by service or age

Less favourable treatment because of age is direct discrimination unless you can show it is a proportionate means of achieving a legitimate aim — objective justification [6]. The 2010 Order also sets exceptions [7]:

• Age. DC contribution rates may differ by age where the aim is to equalise, or make more nearly equal, the age-related benefit each year's contributions produce for comparable workers (Schedule 1 paragraph 4; Schedule 2 paragraph 1).
• Service. Giving less to people with shorter service is allowed. Where the person disadvantaged has more than 5 years' service, it must reasonably appear to you that the rule fulfils a business need, such as encouraging loyalty or rewarding experience (article 6).

• No tiers. Simplest, with no age analysis.
• Service tiers. Can support retention. A step at 5 years or earlier needs no further test; a later step needs the business-need test.
• Age tiers. Can offset the shorter time older joiners have to build a pot. They must fit the equalising aim or be objectively justified. A tier meant to reward seniority falls outside the exception.

Record the aim and evidence before introducing any tier.

Step 5: Set the default employee rate and auto-escalation

On automatic enrolment you must deduct what the jobholder owes under the scheme rules [11], so the rules fix the default. Other deductions from wages need authority in statute or the contract, or the worker's prior written agreement [12].

In the lumi reward benchmark, 81.4% of organisations default joiners to the statutory minimum only (common). 8.9% set 1 to 2 points above, 5.5% set 3 or more points above and 4.2% use an opt-up default (all rare) (n = 237, N/A excluded from base).

In the lumi reward benchmark, 64.9% of organisations do not operate auto-escalation (common), 19.8% operate it by default and 15.3% as opt-in (both rare) (n = 268).

Step 6: Decide how salary sacrifice fits

Under salary sacrifice, the minimum test uses post-sacrifice pay, and membership cannot depend on agreeing to sacrifice [13]. Employer pension contributions are free of National Insurance. From April 2029, only the first £2,000 a year of employee contributions through salary sacrifice will be exempt [14]. See How to prepare your pension salary sacrifice scheme for the 2029 cap.

Step 7: Model the cost

This model applies 5% employer and 4% employee on each basis, checks the legal minimum, and uses annual figures.

LEL, UEL = 6_240, 50_270   # 2026/27 qualifying earnings band, annual

def qe(pay):
    return max(0, min(pay, UEL) - LEL)

def cost(basic, variable, er=0.05, ee=0.04):
    total = basic + variable
    min_er, min_all = qe(total) * 0.03, qe(total) * 0.08
    print("legal minimum:", round(min_er, 2), round(min_all, 2))
    for name, base in [("QE", qe(total)), ("Basic", basic), ("Total", total)]:
        ok = base * er >= min_er and base * (er + ee) >= min_all
        print(name, base, round(base * er, 2), round(base * ee, 2),
              round(100 * base * er / total, 2), ok)

cost(30_000, 8_000)   # earner A (illustrative)
cost(60_000, 0)       # earner B (illustrative)

Inputs (illustrative): earner A has £30,000 basic pay and £8,000 overtime and shift pay. Earner B has £60,000 basic pay only.

Result: every row meets the minimum (A: £952.80 employer, £2,540.80 total; B: £1,320.90 and £3,522.40). For A, basic pay costs £88 less than qualifying earnings, because it excludes £8,000 of variable pay while the band excludes only £6,240; total pay costs £312 more. For B, the band's upper limit saves £798.50.

In the lumi reward benchmark, organisations report that employer pension contributions cost a median of 7% of total reward spend (25th percentile 5.5%, 75th percentile 9.5%; n = 268).

Step 8: Check whether you must consult

The duty applies to employers with 50 or more employees in Great Britain (regulation 3) [5]. Listed changes include:

• occupational DC schemes: reducing employer contributions, and introducing or increasing member contributions (regulation 8);
• personal pension schemes: stopping or reducing employer contributions, and increasing member contributions (regulation 9).

Affected members are the active and prospective members the change relates to (regulation 7(4)). Consultation must last at least 60 days (regulation 15). Changes needed to comply with a statutory provision are exempt (regulation 10).

Raising employer contributions is not a listed change, but a redesign can cut some people's contributions while raising the average: moving earner A to a basic pay basis cuts their employer contribution by £88, and a switch to matching or a lower entry tier can do the same.

If rates are contractual, changing them needs agreement. New protections on dismissing and re-engaging staff to change terms start in January 2027, so take advice.

Checklist

• Confirmed the 3% and 8% minimum on 2026/27 qualifying earnings
• Chosen an earnings basis and, if needed, a certification set
• Chosen flat, matched or core plus match, and checked the lowest point
• Recorded the aim and evidence for any service or age tier
• Set the default employee rate in the scheme rules
• Decided on auto-escalation and confirmed authority to deduct
• Checked the effect of salary sacrifice and the 2029 cap
• Modelled cost on each basis, with a minimum check per person
• Checked for listed changes and planned 60 days' consultation if needed
• Set reminders for April thresholds and certificate renewal

Related

• Workplace pension contributions: UK benchmark 2026 — the benchmark findings behind the figures in this guide.
• How to prepare your pension salary sacrifice scheme for the 2029 NIC cap
• How to set up group income protection
• How lumi works: methodology — how these figures are collected and calculated.