FOR ADVISERS ONLY
COVID-19 and pension contributions
- The requirement under pensions legislation to consult on certain changes only applies if an employer has at least 50 employees.
- A salary sacrifice arrangement for pension contributions is separate from the automatic enrolment provisions and pension contribution obligations set out in a pension scheme’s rules or governing documentation.
- The existence of the grant available under the Coronavirus Job Retention Scheme does not change an employer’s usual pension contribution payment obligations or processes.
- The salary for calculating the grant should not include the cost of non-monetary benefits provided to employees, including taxable benefits in kind.
- Benefits provided through salary sacrifice schemes, including pension contributions, that reduce an employee’s taxable pay should not be included in the reference salary.
When calculating the pension contribution due for a furloughed worker who has agreed a salary sacrifice arrangement for pension contributions, any contractual obligations an employer has entered into and the obligation in the pension scheme rules continue to apply as normal.
However, as all of the 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 to be paid to the pension scheme under the pension scheme rules.
Employer consultation requirements
The requirement under pensions legislation to consult on certain changes only applies if an employer has at least 50 employees.
Before an employer can decide to decrease employer pension contributions they must carry out a consultation in accordance with a number of rules. These rules include that the minimum period of consultation must be 60 days.
However, if all of the following apply, the Pensions Regulator has confirmed they will not take regulatory action in respect of a failure to consult for the full 60 days:
- They have furloughed staff for whom they are making a claim under the Coronavirus Job Retention Scheme.
- They are proposing to reduce the employer contribution to their defined contribution scheme in respect of furloughed staff only. For staff who have not been furloughed the existing pension contribution rate will continue to apply.
- The reduced contribution rate for furloughed staff will only apply during the furlough period, after which time it will revert to the current rate.
- The employer has written to the affected staff and their representatives to describe the intended change and the effects on the scheme and on the furloughed staff.
The Pensions Regulator is encouraging employers to carry out as much consultation as they can. This regulatory easement will be maintained until 30 September 2020, but this date may be reviewed.
The Pensions Regulator expects employers to comply with the full consultation requirements when deciding to decrease the employer contribution if all the above criteria have not been met.
What if the employer’s pension scheme operates on a salary exchange basis?
A salary sacrifice arrangement is a contractual agreement between the employee and their employer, where the employee agrees to give up some of their salary in return for a benefit such as a pension contribution by the employer. It is usually set up by changing the terms of the employee’s contract of employment by agreement.
The operation of a salary sacrifice arrangement for pension contributions is separate from the automatic enrolment provisions and pension contribution obligations set out in a pension scheme’s rules or governing documentation.
Pensionable pay
Pensionable pay sacrifice is operated then usually, under the pension scheme rules, the obligation on the employer is to pay the total contribution, however it is calculated. In most cases, the scheme rules or governing documentation will define pensionable pay as the notional pre-sacrifice pay. The amount the employee sacrifices is paid across to the pension scheme as part of the overall employer contribution. There is no obligation under the pension scheme rules or governing documentation for the member of staff to contribute.
The existence of the grant available under the Coronavirus Job Retention Scheme does not change an employer’s usual pension contribution payment obligations or processes.
Guidance from the Government makes it clear that the salary for calculating the grant should not include the cost of non-monetary benefits provided to employees, including taxable benefits in kind. Benefits provided through salary sacrifice schemes, including pension contributions, that reduce an employee’s taxable pay should also not be included in the reference salary.
Schemes which operate a salary sacrifice basis will therefore get back less from the Job Retention Scheme than if they didn't have the arrangement, as the salary used for the 80% grant and the minimum employer contribution is reduced.
It is important to note that all the grant received to cover an employee’s subsidised furlough pay must be paid to them in the form of money. The grant cannot be reduced to pay for the pension contribution.
This is because the reference salary to be used for calculating the grant is from the last pay period before 19 March 2020 or, the 28 February if the employer had used this date based on previous HMRC guidance, all of which relate to the past tax year.
Therefore choosing to remove the agreement after the event would not change the grant. We have done a worked example to bring this to life.
If they do this, it will have an impact on both employer and employee National Insurance contributions.
Life events
HMRC has confirmed that COVID-19 counts as a life event that could warrant changes to salary sacrifice arrangements, if the relevant employment contracts are updated accordingly.
Examples
When calculating the pension contribution due for a furloughed worker who had agreed a salary sacrifice arrangement for pension contributions before March 2020, any contractual obligations entered into and the obligation in the pension scheme rules continue to apply as normal.
- The pre-sacrifice salary is £22,500 a year (£1,875 a month)
- Employer - pays a pension contribution of 5%.
- Employee - pays a pension contribution of 5%. Under the contract of employment, they have agreed to reduce their contractual salary to £1,781.25 p.m. in return for a monthly pension contribution of £93.75 to be paid over to the pension scheme as part of the employer contribution.
In February 2020 the employer pension contribution required under the pension scheme rules is £187.50 (10% of the notional pre-sacrifice pay of £1,875). The employer is required to pay their employer pension contribution of £187.50 over to the pension scheme by the agreed due date.
Contractually, under the salary sacrifice arrangement the employee has agreed to sacrifice £93.75 to be paid over to the pension scheme as part of the employer’s total pension contribution of £187.50.
The amount the employee has agreed to sacrifice as a pension contribution may appear on the payroll as an employee pension contribution. So in this example the payroll may show an employee pension contribution of £93.75 and an employer pension contribution of £93.75.
However, it is important to remember that the obligation in the pension scheme rules is for the employer to pay the total contribution, in this case £187.50, and under the pension scheme rules there is no requirement on the employee to pay a pension contribution.
The government’s guidance on the Coronavirus Job Retention Scheme sets out that when calculating 80% of a furloughed worker’s salary or wage, the reference salary or wage to use is the post-sacrifice amount. All of the grant received from government to cover the furloughed worker’s pay must be paid to them in the form of money. The pay during the furlough period should be treated as the post-sacrifice pay so that no further sacrifice is made on that amount.
It is important to note that this is just for the purposes of making a claim for a grant from government and what that grant can be used for. Any contractual obligations an employer has entered into as part of the salary sacrifice arrangements and the obligation in the pension scheme rules continue to apply as normal, so the first step for an employer is to consider their contractual arrangements.
If an employer does not want to reduce the employee’s salary or if they are unable to because of contractual arrangements, then the employer will continue to pay their furloughed workers their full pay and calculate pension contributions and the salary sacrifice element as usual on this pay. In this case the employer can only claim a grant under the Coronavirus Job Retention Scheme to cover the lower of 80% of the furloughed workers pay or £2,500 a month plus the associated employer’s National Insurance contribution costs and the employer’s pension contribution up to the level of the AE statutory minimum employer contribution. From August the amount the employer can claim reduces. The following summarises the changes:
| July | August | September | October | |
|---|---|---|---|---|
| Government contribution: employer NICs and pension contributions | Yes | No | No | No |
| Employer contribution: employer NICs and pension contributions | No | Yes | Yes | Yes |
| Employer contribution: wages | Nil | Nil | 10% up to £312.50 p.m. | 20% up to £625 p.m. |
| Employee receives | 80% up to £2,500 p.m. | 80% up to £2,500 p.m. | 80% up to £2,500 p.m. | 80% up to £2,500 p.m. |
If an employer has agreed a reduction in pay with their furloughed worker, they may need to make some changes to their payroll processes. The changes include:
- Usually an employer will know the employee’s notional pre-sacrifice pay, and the pension contributions due under the pension scheme rules or governing documentation are calculated by the payroll system based on this amount. In these circumstances the employer will know the post sacrifice furlough pay. The employer will need to work out the notional pre-sacrifice pay in a pay period based on treating the furlough pay as the employee’s post-sacrifice amount. The employer can then calculate the total employer pension contribution as normal. Examples 2,3 and 4 that follow show how to calculate the notional pre-sacrifice pay.
- An employer cannot deduct the amount the furloughed worker would normally sacrifice in their wage for pension contribution from the furlough pay, as this will mean that the amount the employer has claimed under the Coronavirus Job Retention Scheme will not have all been paid as money. This means the employer will pay the total contribution due under the pension scheme. Until the end of July the employer can claim as part of the grant the AE statutory minimum employer contribution on the pay included in the grant.
- If the contractual arrangements with the furloughed worker specify that a set amount will be sacrificed and paid to the pension scheme each pay period, (e.g. £100) the employer will continue to pay this amount across as part of the employer contribution. This applies even if this amount is greater than the amount due under the pension scheme rules or governing documentation (see example 5 below).
- The employee’s pre-sacrifice salary is £24,000 a year (£2,000 a month).
- Employer - the pension scheme rules require a total contribution of 10% from the employer on the notional pre-sacrifice pay. This includes 5% from the employee using salary sacrifice.
- Employee - under the contract of employment, the worker has agreed to sacrifice £1,200 p.a. to be paid across to the pension scheme as part of the overall employer’s pension contribution. Their post sacrifice salary is £22,800. This is equivalent to a monthly salary of £1,900 and a monthly sacrificed amount of £100.
February contribution – pre furlough
In February 2020 the employer pension contribution required under the pension scheme rules is £200 (10% of the notional pre-sacrifice pay of £1,200). The employer is required to pay their employer pension contribution of £200 over to the pension scheme by the agreed due date.
Job retention scheme
- In February 2020 their contractual post-sacrifice salary was £1,900.
- The amount that can be claimed under the Job Retention Scheme is:
- 80% of £1,900.00 = £1,520.00.
- The employer has chosen, after reviewing their contractual arrangements, to pay the furloughed worker £1,520.00 a month during the furlough period.
Pension contributions in furlough
To calculate the pension contribution on this salary:
- The furloughed worker’s pay of £1,520 is to be treated as their post-sacrifice pay - i.e. no further salary sacrifice amount can reduce the pay further.
The notional pre-sacrifice pensionable pay based on treating £1,520 as the post sacrifice pay is £1,600. This is calculated using the formula:
- Furlough pay / (100% – sacrifice as a % of pay).
- In this case this is £1,520 / (100% – 5%) = £1,600.
The pension scheme rules require a total contribution from the employer of 10% of this notional pre-sacrifice pay. Therefore, the employer contribution to be paid under the pension scheme rules is £160 a month during the furlough period (this includes the £100 required under the salary sacrifice arrangement to be paid across as part of the overall employer pension contribution).
How much can the employer claim back?
Until the end of July 2020 under the Coronavirus Job Retention Scheme the employer may claim a grant to cover the AE statutory minimum employer contribution on the furlough pay of £1,520.00.
The employer may claim:
- For March £30.24, being 3% of (£1,520.00 - £512 (the lower qualifying earnings threshold for 2019/20).
- For April to July £30.00, being 3% of (£1,520.00 - £520 (the lower qualifying earnings threshold for 2020/21).
- From August employers will no longer be able to claim the AE statutory minimum from the government.
- Pre-sacrifice salary is £24,000 a year (£2,000 a month).
- Employer - the pension scheme requires a total contribution from the employer of 8% of the notional pre-sacrifice qualifying earnings. (This includes 5% of qualifying earnings from the employee using salary sacrifice.)
- Employee – the employee has agreed to sacrifice 5% of their qualifying earnings as a pension contribution to be paid as part of the overall employer pension contribution.
February contribution – pre furlough
In February 2020 the amount they sacrificed as pension contribution was:
- £74.40, being 5% of (£2,000 minus the lower qualifying earnings threshold for 2019/20 of £512).
- As a result, their contractual wage at 28 February 2020 was £1,925.60 a month.
- The amount of salary that can be claimed under the grant is 80% of £1925.60 = £1,540.48.
The employer has chosen, after reviewing their contractual arrangements, to pay the employee £1,540.48 a month during the furlough period.
To calculate the pension contribution on this salary:
- The employee’s pay of £1,540.48 is to be treated as their post sacrifice pay - i.e. no further salary sacrifice amount can reduce the pay further.
- The notional pre-sacrifice pensionable pay based on treating £1,540.48 as post sacrifice pay in March 2020 is £1,594.61. This can be found using the formula:
- (furlough pay – (sacrifice as percentage of pay) x lower level of qualifying earnings) / (100% – sacrifice as a % of pay).
- In this case this is £1,540.48 – (5% x £512 (the lower qualifying earnings threshold for 2019/20)) = £1,540.48 - £25.60 = £1514.88, then
- £1,514.88 / (100% - 5%) = £1,514.88/95% = £1,594.61
The pension scheme rules require a total contribution from the employer of 8% of qualifying earnings based on the notional pre-sacrifice pay.
March contribution
In March the employer contribution to be paid under the pension scheme rules is £86.61 (8% of (£1,594.61 - £512).
Until the end of July 2020 under the Coronavirus Job Retention Scheme the employer may claim a grant to cover the AE statutory minimum employer contribution on the furlough pay of £1,540.48.
How much can the employer claim back?
The employer may claim £30.86 (3% of (£1,540.48 - £512)).
Subsequent months when furloughed
In April, when the qualifying earnings threshold changed for the 2020/21 tax year, the notional pre-sacrifice pensionable pay based on a post sacrifice salary of £1,540.48 is £1,594.19, this can be found using the formula:
- (furlough pay – (sacrifice as percentage of pay x lower level of qualifying earnings)) / (100% – sacrifice as a % of pay).
- In this case this is (£1,540.48 – (5% x £520 the lower qualifying earnings threshold for 2020/21)) / (100% – 5%) = £1,594.19.
Therefore, in April 2020 and subsequent months the employer contribution to be paid under the pension scheme rules is £85.94 (8% of (£1,594.19 - £520).
How much can the employer claim back?
Until the end of July 2020 under the Coronavirus Job Retention Scheme the employer may claim the AE statutory minimum employer contribution of £30.62 (3% of (£1,540.48 - £520)).
- Pre-sacrifice salary is £42,000 a year (£3,500 a month).
- Employer - the pension scheme requires a total contribution from the employer of 8% of the notional pre-sacrifice qualifying earnings. (This includes 5% of qualifying earnings from the employee using salary sacrifice.)
- Employee - the employee has agreed to sacrifice 5% of their qualifying earnings as pension. The amount they sacrifice as a pension contribution to be paid as part of the overall employer contribution is 5% of (£3,500 – the lower earnings threshold for 2019/20 of £512) = £149.40.
February contribution – pre furlough
In February 2020 the amount they sacrificed as pension contribution was:
- £149.40 (5% of (£3,500 minus the lower qualifying earnings threshold for 2019/20 of £512).
- Their contractual wage at 28 February 2020 was £3,350.60 a month (£3,500 – £149.40). 80% of this is £2,680.48.
- As this is above the cap of £2,500 a month the amount of salary that can be claimed under the grant is = £2,500.
- The employer chooses to pay the worker to the cap - ie £2,500 a month.
To calculate the pension contribution on this salary:
- The furloughed worker’s pay of £2,500 is to be treated as their post-sacrifice pay - i.e. no further salary sacrifice amount can reduce the pay further.
- The notional pre-sacrifice pensionable pay based on this amount in March 2020 is £2,604.63. This is found using the formula:
- (furlough pay – (sacrifice as percentage of pay x lower level of qualifying earnings)) / (100% – sacrifice as a % of pay).
- In this case this is £2,500 – (5% x £512 (the lower qualifying earnings threshold for 2019/20)) / (100% – 5%) = £2,604.63.
The pension scheme rules require a total contribution from the employer of 8% of qualifying earnings based on the notional pre-sacrifice pay.
March contribution
In March the employer contribution to be paid under the pension scheme rules is £167.41 (8% of (£2,604.63 - £512).
How much can the employer claim back?
Until the end of July 2020 under the Coronavirus Job Retention Scheme the employer may claim a grant to cover the AE statutory minimum employer contribution on the furlough pay of up to £2,500.
In March the employer may claim £59.64, being 3% of (£2,500- £512 (the lower qualifying earnings threshold for 2019/20)).
April and subsequent months
In April, when the qualifying earnings threshold changed for the 2020/21 tax year, the notional pre-sacrifice pensionable pay based on a post-sacrifice salary of £2,500 is £2,604.21. This can be found using the formula:
- (furlough pay – (sacrifice as percentage of pay x lower level of qualifying earnings)) / (100% – sacrifice as a % of pay).
- In this case this is £2,500 – (5% x £520 (the lower qualifying earnings threshold for 2020/21)) / (100% – 5%) = £2,604.21.
Therefore, in April 2020 the employer contribution to be paid under the pension scheme rules is £166.74 (8% of (£2,604.21 - £520).
How much can the employer claim back?
Until the end of July 2020 under the Coronavirus Job Retention Scheme the employer may claim the statutory minimum employer contribution of £59.40 (3% of (£2,500 - £520)).
If the contractual arrangements with the employee specify that a set amount will be sacrificed and paid to the pension scheme each pay period, (eg £100) the employer must continue to pay this amount across as part of the employer contribution (see example 5 below).
- Pre sacrifice salary - £60,000 a year (£5,000 a month)
- Employer - the pension scheme rules require a contribution of 9% from the employer on the notional pre-sacrifice pay. (This includes the £250 sacrificed by the employee.)
- Employee - under the contract of employment, the employee has agreed to sacrifice £250 (5%) a month to be paid over to the pension scheme as part of the overall employer pension contribution.
- Their contractual wage at 28 February 2020 was £4,750 a month.
- 80% of this is £3,800.
As this is above the cap of £2,500 a month the amount of salary that can be claimed under the grant is £2,500. The employer chooses to pay the employee the cap - i.e. £2,500 a month.
To calculate the pension contribution on this salary:
- The furloughed worker’s pay of £2,500 is to be treated as their post-sacrifice pay - i.e. no further salary sacrifice amount can reduce the pay further.
- The notional pre-sacrifice pensionable pay based on this amount in March 2020 is £2,631.58. This has been found using the formula:
- furlough pay / (100% – sacrifice as a % of pay).
- In this case this is £2,500 / (100% – 5%) = £2,631.58.
The pension scheme rules require a total contribution from the employer of 9% of this notional pre-sacrifice pay.
The employer contribution under the pension scheme rules is £236.85 a month during the furlough period (9% x £2,631.58).
However, the employer’s contractual arrangements specify that £250 is to be paid across to the pension scheme as part of the contribution. Therefore, the total contribution to be paid across to the pension scheme by the employer is £250 a month during the furlough period.
How much can the employer claim back?
Until the end of July 2020 under the Coronavirus Job Retention Scheme the employer may claim a grant to cover the AE statutory minimum employer contribution on the furlough pay of £2,500.
In March the employer may claim £59.64 (3% of (£2,500 - £512 (the lower qualifying earnings threshold for 2019/20)) for March.
From April 2020 to July 2020 when furloughed the employer may claim £59.40 (3% of (£2,500 - £520 (the lower qualifying earnings threshold for 2020/21)).
DC certification
Some employers certify that they can treat their DC pension scheme as a qualifying scheme because it meets an alternative AE statutory minimum contribution requirement. In this case, the definition of pensionable pay in the scheme rules is likely to be different from qualifying earnings. Pensionable pay may just include basic pay and not overtime or bonuses and may require contributions to be deducted from the first penny earned.
The provisions of the pension scheme rules or governing documentation are unaffected by the Coronavirus Job Retention Scheme. The employer calculates, deducts and pays the pension contribution due under the pension scheme as normal.
- The employer has certified under set 1 and the scheme rules or governing documentation require a total contribution of 9% of pensionable pay and the employer contribution is 4% of pensionable pay.
- Pensionable pay is wage or salary only with fluctuating elements of pay such as overtime or bonuses excluded.
- The employer has calculated the furlough pay to be £500 a month during the furlough period.
In April 2020 the employer runs payroll and calculates the pension contribution due on £500 in the normal way to give:
- a member contribution to be deducted from salary of £25 (5% of £500)
- an employer contribution of £20 (4% of £500)
In April 2020 the lower qualifying earnings threshold is £520, therefore there are no qualifying earnings in this period and so no grant reclaim.
Working part-time while on furlough from 1 July 2020
Under the rules of the Coronavirus Job Retention Scheme, pay cannot be reduced below the lower of 80% of their wages or £2,500 a month (or the pro-rated equivalent if the employee is working for the employer part time after 1 July 2020). It may be possible to operate salary sacrifice as normal if the amount of pay above the furlough pay is sufficient. For example, an employee has a salary sacrifice arrangement in place to sacrifice £50 a week to be paid as a pension contribution. Their total pay in a week is £150, made up of £80 for the period they were working whilst on furlough and £70 furlough pay. Their pay cannot be reduced below £70, so depending upon the contractual agreements between the employer and the employee during the furlough period the £50 sacrifice may be made.
If the amount of pay above the furlough pay is not sufficient, for example the employee’s total pay in the example above was £100 in the week, then whether or not part of the sacrifice can be made (£30 instead of £50 in this example) will depend on the contractual agreement in place between the employer and employee.
Note
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.
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