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EPN415 - Increase in the Pensions Earnings Cap 2015-16

Audience:

This notice will be of interest to:

  • HR Managers who deal with high earners; and
  • Payroll Managers

Action:

  • To note the contents; and
  • Update systems and processes accordingly

Timing:

  • Effective from 6 April 2015

Background

  1. Before 6 April 2006, HM Revenue & Customs (HMRC) limited the amount of salary that could be used in calculating the pensionable pay of a member who joined the Civil Service pension arrangements on or after 1 June 1989. This limit was referred to as the “earnings cap” or “permitted maximum”.
  2. Although HMRC no longer require us to limit benefits to the earnings cap, the rules of classic, classic plus and premium 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 2015-16

  1. From 6 April 2015 to 5 April 2016 the earnings cap will be £149,400.

Who does the earnings cap apply to?

  1. Members of nuvos and alpha are not subject to the earnings cap (although any “linked” benefits calculated on a final salary basis are generally capped unless they were transferred on an uncapped basis under the Club transfer provisions).
  2. For classic, classic plus and premium, 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 EPN 238.

Employer and employee contributions

  1. Where a member’s pensionable earnings 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 you must apply it based on the monthly salary.
  2. For employee contributions from 1 April 2015 (see EPN 403 and 2015 Member contribution examples), the employee contribution rate is set after the pensionable earnings cap has been applied (where applicable).

Treatment or part-time pay

  1. The cap applies proportionately where a member works part-time.
  2. For example, a member earns £90,000 a year for a 3 day week. The full-time equivalent salary is £150,000, which is clearly above the cap for full-time pay. The pro-rata cap is: £149,400 x 3 ÷ 5 = £89,640.
  3. ASLC bands are determined by full-time equivalent salary, which means that the ASLC banding will relate to the cap of £149,400. On the other hand, member contribution banding is determined by part-time salary, which means that member contribution banding will relate to the pro-rata figure. The annualised pensionable earnings figure for the purpose of setting the member contribution rate in the above example will therefore be £89,640. Once the bandings are determined, both ASLCs and member contributions are levied against the pro-rata figure of £89,640.

Reference: 

This document replaces EPN 140, EPN 154, EPN 206, EPN 238, EPN 272, EPN 294, EPN 316, EPN 353 and EPN 376.

Contact

If you have a question about the distribution of EPNs contact employerpensionnotice@cabinetoffice.gov.uk.

You can find electronic copies of the Employer Pension Guide, all current EPNs and forms on our website.

This notice is for employers and should not be issued to scheme members.

If members have a question about their pension they can find information on this website or by contacting your Pension Service Centre.