The Effect Of Furlough On Pension Contributions – An Employer’s Perspective

The Government introduced the Coronavirus Job Retention Scheme (CJRS) on Friday 20th March as part of a package of measures to safeguard jobs and alleviate the impact of COVID-19 on businesses across the country.

The scheme enables businesses to recover 80% of wage costs up to £2,500 per month for employees on furlough leave, plus the associated employer National Insurance (NI) contributions and minimum automatic enrolment employer pension contributions on that wage.

Furlough and pension contributions – Advice to employers

The first thing to note for employers in terms of pensions is that the CJRS only covers the minimum contribution for auto enrolment purposes. In this case, the definition of pensionable pay is qualifying earnings.

With this method, contributions are based on a salary in between the lower level of qualifying earnings of £520 (or £512 for 2019/20 tax year) and upper level of £4,167 for a pay reference period of one month. For example, if an employee earns £30,000 and is furloughed, their salary would reduce to £24,000 per annum or £2,000 per month. The CJRS would cover the employer’s pension contribution of £44.64 for March and £44.40 for April, May and June.

However, if a company uses one of the other three contribution methods for auto enrolment purposes, the definition of pensionable pay is likely to be different from qualifying earnings. For instance, if the 8% certification method is used, the contribution levels are based on pensionable pay and therefore starts from the first pound of earnings. If the employer uses the 8% certification method in the above example, the minimum 3% employer contribution would be £60. As the CJRS grant would only cover £44.40 of the pension contribution, the employer would have to make up the difference.

The other thing for employers to be wary of is where an employee has a salary sacrifice arrangement in place for their pension contributions. A salary sacrifice arrangement is a contractual obligation and is separate from the auto enrolment provisions and pension contribution obligations set out in a pension scheme’s rules. When calculating the pension contribution due for a furloughed worker with a salary sacrifice arrangement in place for pension contributions, any contractual obligations the employer has entered into, and the obligation in the pension scheme rules, continues to apply as normal.

However, as all of the CJRS grant claimed must be paid to a furloughed worker in the form of money, this may mean that where a salary sacrifice arrangement is in place for pensions, an employer will need to amend their payroll processes to calculate the pension contribution under the pension scheme rules.

The Government’s guidance on the CJRS sets out that when calculating 80% of a furloughed worker’s salary or wage, the reference salary or wage to use is the amount after the salary has been sacrificed. The pay during the furlough period should be treated as the post-sacrifice pay, so that no further sacrifice is made on that amount. With a salary sacrifice arrangement, the pension contribution is taken from the gross pay and so the first step for an employer is to calculate the pre-sacrifice pay.

Example

There are various ways a salary sacrifice arrangement may work, but in this example, the pension scheme rules require a contribution of 10% from the employer on the notional pre-sacrifice pay. Under their employment contract, the worker has agreed to sacrifice £125 of pay as a pension contribution as part of the overall employer’s pension contribution. Their contractual salary is £28,500, or £2,375 per month, plus a contribution of £1,500 to be paid to the pension scheme.

The amount of salary that can be claimed under the CJRS is 80% of £2,375, meaning the worker will receive £1,900 per month during the furlough period. The furloughed worker’s pay of £1,900 is to be treated as their post-sacrifice pay – i.e. no further salary sacrifice amount can reduce the pay further.

To calculate the pre-sacrifice pay, a formula can be used:

Furlough Pay / (100% – Sacrifice as a % of pay)

In this case, the pre-sacrifice pay is (£1,900 / (100% – 5%)) = £2,000.

The pension scheme rules require a total contribution from the employer of 10% of this notional pre-sacrifice pay. Therefore, the employer contribution under the pension scheme rules is £200 a month during the furlough period (this includes the £125 required under the salary sacrifice arrangement as part of the overall employer pension contribution).

Under the CJRS, the employer may claim a grant to cover the statutory minimum employer pension contribution on the furlough pay of £1,900. The employer may claim £41.64 (3% of (£1,900 – £512)) for March and £41.40 for each month in 2020/21 (3% of (£1,900 – £520)) during the furlough period. Therefore, the employer will have to cover the rest of the pension contribution required under the pension scheme rules.

Comment

It has been confirmed by HMRC that COVID-19 counts as a life event, meaning that the terms of a salary sacrifice arrangement could be changed, if the relevant employment contract is updated accordingly.

For support with amending employment contracts, please contact our expert Employment Law team.