The Earnings Scale

The government has set out a scale of earnings which enables your National Insurance contributions and the value of your State Second Pension to be calculated. The earnings scale is essentially a series of thresholds which divide your income into different bands. The earnings scale is divided by:

• LEL = the Lower Earnings Limit. This is the minimum amount of money you must earn each week in order to be credited with National Insurance contributions as an employee, and thus build up your rights to a State Pension and other benefits that are based on your National Insurance record. It is also the minimum amount you must earn in order to start building up S2P. For 2007/2008, the LEL is £87 a week.

• QEF = the Qualified Earnings Factor. This is the yearly LEL rate, that is, the total value of the weekly LEL over the whole year. For 2007/2008 the QEF is £4,524.

• PT = the Primary Threshold, sometimes referred to as the Earnings Threshold or ET. This is the level of earnings at which you begin paying National Insurance contributions as an employee, and thus build up your rights to a State Pension and other benefits that are based on your National Insurance record. For 2007/2008, the PT is £100 a week. Employees earning more than the LEL but less than the PT each week are credited as having paid class one N.I. contributions but are not actually required to contribute any money. For more information on this theme see National Insurance Contribution Classes.

• ST = the Secondary Threshold. This is the level of earnings at which you begin paying National Insurance contributions on your employees’ earnings as an employer. This threshold is currently set in line with the PT, at £100 a week.

• LET = the Lower Earnings Threshold. This threshold marks the boundary for building up S2P at forty percent of your earnings. For 2007/2008 the LET is set at £13,000 a year. For the purposes of S2P, all employees earning between the QEF and the LET are credited as having earnings equal to the LET and are given S2P benefits based on this amount.

• UET = the Upper Earnings Threshold. The UET is also used to mark an S2P boundary. Earnings between the LET and UET build up S2P at ten percent. The UET is set at £30,000 for 2007/2008.

• UEL = Upper Earnings Limit. This is the maximum amount of earnings on which an employee is required to pay full rate N.I. contributions. Above the UEL N.I. contributions are reduced from 11% of your earnings to 1% of your earnings. These N.I. contributions are mandatory but no longer count towards State Benefits. Any earnings which exceed the UEL will not be eligible to build up S2P benefit. Employers however must pay N.I. contributions at 12.8% for all employees’ earnings over the PT. For 2007/2008, the UEL is £34,840 a year.

• UAP = the Upper Accrual Point. This is set to replace the UEL as the pension system progresses. This will replace the UEL as the upper limit for contributions which count towards State Benefits. Currently however the UEL remains in use.

The earnings scale is essential in understanding the way that your National Insurance contributions and your S2P entitlement are calculated. Each year the values of these terms will change: the numbers given above are relevant for the tax year 2007/2008 only. Over time the ways in which the earnings scale is used might also change. Your local Citizens Advice Bureau and your pension savings scheme provider will be able to keep you informed of any major alterations to the system.