EPN623 - Increase in the Pensions Earnings Cap 2021-22

Audience 

This Notice will be of particular 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 2021

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 requires 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 2021-22

3. From 6 April 2021 to 5 April 2022 the earnings cap will be £172,800.

Who does the earnings cap apply to?

4. 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).

5. For classic, classic plus and premium schemes, 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

6. Where a member’s pensionable earnings are 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 part-way through a year, or their salary rises above the cap during a financial year, you must apply it based on the monthly salary.

7. For employee contributions from 1 April 2015, the employee contribution rate is set after the pensionable earnings cap has been applied (where applicable).

Treatment or part-time pay

8. The cap applies proportionately where a member works part-time.

9. For example, a member earns £104,100 a year for a 3-day week. The full-time equivalent salary is £173,500, which is above the cap for full-time pay. The pro-rata cap is: £172,800 x 3 ÷ 5 = £103,680

10. ASLC bands are determined by full-time equivalent salary, which means that the ASLC banding will relate to the cap of £172,800. 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 £103,680. Once the bandings are determined, both ASLCs and member contributions are levied against the pro-rata figure of £103,680.

Reference 

This document replaces EPN140, EPN154, EPN206, EPN238, EPN272, EPN294, EPN316, EPN353, EPN376, EPN415, EPN449, EPN485, EPN529, EPN591 and EPN565.

Contacts

If you require any further assistance on the content of this EPN, please contact: communications@mycsp.co.uk 

If you have a question about the distribution of EPNs, or would like to receive them in a different format, please contact EPN@MyCSP.co.uk.

You can find electronic copies of the Employer Pension Guide, all current EPNs and forms in the Employer section of the Civil Service Pensions website.

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

Members can find information about their pension by visiting the member's section.

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