Audience: This Notice will be of particular interest to:
- HR Managers who deal with high earners
- Payroll Managers
- Note the contents and apply the new limit Timing The change is effective from 6 April 2009
Prior to 6 April 2006, HM Revenue & Customs (HMRC) limited the amount of salary that could be used in calculating the pensionable pay of a civil servant who, on or after 1 June 1989, joined the Civil Service pension arrangements. This limit was referred to as the “earnings cap” or “permitted maximum”.
Although HMRC no longer require us to limit benefits by reference to the earnings cap, the rules of the “final salary” sections of the PCSPS continue to restrict benefits in this way. We calculate the earnings cap using the same method as was previously used by HMRC.
Earnings Cap level for 2009-10
6 April 2009 – 5 April 2010 £123,600
Who does the earnings cap apply to?
Members of nuvos are not subject to the earnings cap (although any “linked” benefits calculated on a final salary basis are generally capped unless derived from an uncapped transfer from a Club scheme).
For the final salary schemes classic, premium and classic plus, the earnings cap applies to all civil servants who joined, or returned to, the Civil Service on or after 1 June 1989, except those listed below.
- Members who joined premium on or after 6 April 2006 and for whom a business case for waiver of the cap was agreed with the Cabinet Office (Civil Service Pensions Division) before the member’s appointment (in such cases the cap would still apply to any deferred benefits aggregated into current service)
- Members who joined a By-analogy scheme before June 1989 and who transferred to PCSPS from that scheme without a break in service.
- Members who were staff of NHS Trusts and Health Authorities who joined the Civil Service pension arrangements on transfer to the Department of Health (or its equivalent in Scotland and Wales), and were employed by the NHS before June 1989.
- Members who joined the scheme before June 1989 and went on secondment, or a posting, to an employer and were fully expecting to return to the Civil Service, are not subject to the earning cap provided they return without a break in service.
- Members who joined the scheme before June 1989 and have returned after taking maternity leave or adoption leave providing they rejoined the Civil Service pension arrangements within one month of returning to work.
- Members who joined the scheme before June 1989 and who have returned after taking unpaid leave and have rejoined the Civil Service Pension arrangements within one month of returning to work.
- Members who joined the scheme before June 1989 and have returned after a break in service of one month or less.
- When a member joins the Civil Service Pension arrangements as part of a TUPE transfer you must not apply the cap if they were uncapped immediately before the transfer.
- When a member brings in a transfer value from another pension scheme the service credit they receive may be uncapped, even if they are capped for their PCSPS benefits derived from service in the Civil Service. Your APAC can advise whether a particular transfer value is capped and what implications this has for the member. If you have members with a mix of capped and uncapped service you are strongly advised to work closely with your APAC when benefit statements (or retirement estimates) are required for these people, as PenServer cannot handle these cases and they have to be dealt with manually.
Employer and Employee contributions
Where a member is subject to the earnings cap their contributions must only be calculated on their salary below the cap. The same applies to employer contributions (ASLCs). You should advise the member that the earnings cap will apply to them. If a member joins partway through a year, or their salary rises above the cap during a financial year and they are in the classic scheme, you must apply it based on the monthly salary. (See the Service and Pay Pensions Manual – Pensionable Earnings: 5.1 Annex A 10 for further information). If the member is in the premium scheme the full earnings cap that is applicable at the time of calculation is used.
The cap applies proportionately when actual part-time pay is used in calculating, for example, death benefit. For example, a member earns £90,000 for a 3 day week. The full time equivalent salary is £150,000, which is clearly above the cap for full time pay. The cap applies proportionately to the part time pay and so in this case you should treat the member as if the cap were:
£123,600 x 3 ÷ 5 = £74,160
All pay in excess of this level should be disregarded for member contributions and ASLCs.
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