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Furloughed income, salary sacrifice and auto enrolment

The Pensions Regulator (TPR) has issued guidance following the introduction of the Coronavirus Job Retention Scheme (CJRS) by the Government. Under this scheme HMRC have committed to pay a grant to employers of 80% of employees’ salaries up to a maximum of £2,500 gross per month for those people who have been furloughed from work (put on leave). This scheme has been designed to help employers pay salaries and retain staff during this period of uncertainty on the basis they will all be ready to restart work once the covid restrictions are lifted.

This Government intervention has been welcomed but has caused questions to be raised with certain employer funded pension schemes, specifically concerning salary sacrifice and auto enrolment.

This is a brief overview of the 2 main elements that have raised questions. This is not a comprehensive article and we would always suggest further reading. Employers who are uncertain should seek guidance from their pension and AE compliance advisers, and may need legal advice.

Salary Sacrifice

Pension salary sacrifice is when an employee agrees to give up a portion of their taxable salary and in return receives an appropriate pension contribution paid by the employer.

TPR have confirmed that salary sacrifice will have an effect on the CJRS entitlement to individuals. CJRS limits are set based on the taxable income the employee would have been receiving. If the employee had entered into a salary sacrifice arrangement, they have effectively reduced their taxable income by the amount of the sacrifice and this is what the CJRS will use to base income on.

The amount of salary for which a grant may be claimed

  1. The grant given by the government is to be used wholly for the payment to the employee.
  2. This means the employer can only claim on the salary after the sacrifice has been applied (i.e. salary of £2,000pm before salary sacrifice and sacrifice 10% so can only claim furlough on £1,800).
  3. You would then look at this as the employee pay after sacrifice.
  4. So CJRS payment is 80% of £1,800 = £1,440.

In the majority of pension schemes the scheme rules will determine who is paying pension contributions and to what level. This may well define what salary is to be used for the purposes of pension contributions. As this definition will not have changed due to COVID-19 measures this may mean the employer has an additional responsibility for any shortfall.

The amount of the employers’ pension contribution

  1. The salary sacrifice is a contract of employment agreement between the employer and employee. This then means the agreement will be based on salary as defined within the wording. This is likely to be the full salary and not net after the sacrifice has been made (i.e. not based on the governments grant.
  2. This then means that for employer pension contributions this will be based on the furlough figure grossed up by the sacrificed salary.
  3. So, as the agreed sacrifice was 10% in this example, you would do £1,440/90 x 100 = £1,600
  4. The employer would then pay the pension contribution including the element relating to sacrificed salary) on this figure.

The effect of the furloughed income levels may have an effect for both cases where the employee has salary sacrifice but also where an agreed level of salary is paid by the employer on behalf of the employee (under relief at source (personal pensions) arrangements). In these cases the payroll scheme and even contracts may need to be amended to account for these circumstances.    

TPR have published guidance on these cases which you can access here.

In addition HMRC have also published an on-line calculator that will help with the CJRS calculation which can be accessed here.

Auto enrolment (AE)

Although many things have changed due to the current circumstances, there is still a responsibility to carry on funding AE schemes. However, employers are also being helped here. Under the CJRS the employer is able to claim a grant to cover the 3% statutory employer AE amount between the lower earnings threshold (£512) and the £2,500 maximum limit.

Care does need to be taken with cases where the scheme being used is a qualifying scheme rather than an AE scheme. In these schemes the rules and contracts of employment may have different definitions of pensionable income that need to be considered, especially when considered with furloughed pay.

Under these circumstances the pay may be based on slightly different criteria than AE schemes and, when taken into consideration with potentially reduced furloughed income this can make a difference when trying to claim.

Example;

The scheme rules of a qualifying scheme (net pay) require a 5% employee contribution and an employer contribution of 4% of pensionable pay. Pensionable pay is wage or salary only with fluctuating pay such as overtime or bonuses excluded.

The furlough pay is £500 a month during the furlough period (so 80% of value of £625)).

In April 2020 the employer calculates the pension contribution due on £500 in the normal way to give:

  • a member contribution of £25 (5% of £500)
  • an employer contribution of £20 (4% of £500)


The lower qualifying earnings threshold (the level at which you begin to qualify for AE) in 2020/21 is £520. This then mean there are no qualifying earnings in this period and so no grant reclaim of 3% for the employer.

There are many other little points that may need to be considered and it is recommended that you visit The Pension Regulator website to find details of the general points discussed here and points about furloughed income and AE.

This is a brief overview of the 2 main elements that have raised questions. This is not a comprehensive article and we would always suggest further reading. Employers who are uncertain should seek guidance from their pension and AE compliance advisers, and may need legal advice.


The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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