EPN316 - Increase in the Pensions Earnings Cap 2012-13

Date posted: 01/01/2012

Audience: HR Managers who deal with high earners & Payroll Managers

Action: Note the contents

Timing: Effective from 6 April 2012

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 civil servant 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 2012-13

3. from 6 April 2012 to 5 April 2013 the earnings cap will be £137,400

Who does the earnings cap apply to?

4. Members of nuvos 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 provision).
5. 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 EPN238.

Employer and Employee contributions

6. Where a member’s pensionable pay 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.

Special cases

7. The cap applies proportionately when actual part-time pay is used in calculating, for example, death benefit.
8. 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 cap applies proportionately to the part time pay and so in this case you should treat the member as if the cap were: £137,400 x 3 ÷ 5 = £82,440. All pay in excess of this level should be disregarded for member contributions and ASLCs.

Reference

This document replaces EPN140, EPN154, EPN206, EPN238, EPN272 and EPN294

Contacts

Enquiries regarding distribution or to receive in a different format

Mycsp.basingstoke@dwp.gsi.gov.uk