Audience: This Notice will be of particular interest to:
- HR Managers who deal with high earners
- Payroll Managers
Action: Note the contents
Timing: Effective from 6 April 2010
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, however, as the annual RPI for September 2009 was minus 1.4% the earnings cap will remain at the current level.
Earnings Cap level for 2010-11
6 April 2010 – 5 April 2011 £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; however, there are exceptions to this rule which can be found in EPN238. It is planned to have the Employer Pension Guide contain this information in the next update.
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 – 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. EPN272
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