CoronavirusApr 29 2020

Covid-19 and pension salary sacrifice

  • Explain how pension contributions are affected by coronavirus
  • Explain how salary sacrifice agreements could be affected if employees are furloughed
  • Outline how employers can recalculate contributions for salary sacrifice and furloughed employees
  • Explain how pension contributions are affected by coronavirus
  • Explain how salary sacrifice agreements could be affected if employees are furloughed
  • Outline how employers can recalculate contributions for salary sacrifice and furloughed employees
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Covid-19 and pension salary sacrifice

If an employer is claiming the government grant under the Coronavirus Job Retention Scheme then this is worked out as 80 per cent of the employee’s post-sacrifice salary (not the notional salary).

All of the grant claimed must be paid to a furloughed worker in the form of money.

Where there is a salary sacrifice arrangement in place, the employer may need to re-calculate the pension contribution to be paid to the pension scheme, and amend payroll processes.

Under most salary sacrifice agreements the pension contribution is a percentage of the notional pre-sacrifice salary.

Once the employee is furloughed the employer will know the post-sacrifice furlough pay, but they need to work out the notional pre-sacrifice salary to be able to calculate pension contributions.

All of the government grant must be paid to the employee. The employer cannot deduct from the furlough pay the amount the furloughed employee would normally sacrifice.

Instead, the employer has to pay the total contribution due under the pension scheme. (Although the employer can claim as part of the grant the minimum statutory automatic enrolment employer contribution.)

An employer should first check any contractual obligations they have entered into as part of a salary sacrifice arrangement.

Examples of salary sacrifice for furloughed employees

Under the salary sacrifice contract, the amount sacrificed could be expressed as a set amount or as a percentage of salary.

The two following examples show how to work out the pension contributions for a furloughed employee where there is a salary sacrifice agreement in place. 

However, salary sacrifice is complex, and different contracts could mean different provisions apply.

Example 1 – sacrifice as an amount

Joe works for ABC Services. His pension scheme has a 10 per cent employer contribution based on Joe’s notional pre-sacrifice pay.

Joe has agreed to sacrifice £100 of pay each month as a pension contribution, and that is paid to the pension scheme as part of the overall employer’s pension contribution. He is left with a post-sacrifice salary of £1,900 a month.

Joe is furloughed. His furloughed pay is £1,520 (80 per cent of £1,900).  

His pre-sacrifice pay is worked out as: furlough pay / (100 per cent - sacrifice as a percentage of pay)

His salary sacrifice was £100, which is 5 per cent of his pre-sacrifice salary of £2,000.

Therefore, his pre-sacrifice pay is: £1,520 / 95 per cent = £1,600

The employer’s pension contribution is 10 per cent of the notional pre-sacrifice pay which is £160 a month during the furlough period.

ABC Services can claim a grant to cover the automatic enrolment statutory minimum employer contribution on the furlough pay of £1,520. This is worked out as:

  • £30.24 (3 per cent of £1,520 - £512) for March; and
  • £30.00 (3 per cent of £1,520 - £520) for other months in the furlough period.

Joe’s pension contribution is now £160 a month, compared to £200 a month if he hadn’t been furloughed.

If the amount deducted from the employee under a salary sacrifice arrangement is greater than the amount due as an employer pension contribution, the employer still has to continue paying the higher amount.

If the furloughed employee’s salary has been reduced, then it’s likely their pension contributions have also been cut.

Example 2– furlough salary is subject to the cap

Dawud works for GHI Marketing. His pension scheme has an employer contribution of 8 per cent of notional pre-salary sacrifice qualifying earnings.

Dawud has agreed to sacrifice 5 per cent of his qualifying earnings as a pension contribution to be paid as part of the overall employer pension contribution.

Dawud’s pre-sacrifice pay is £42,000 a year or £3,500 a month. In February 2020 he sacrificed £149.40 (5 per cent of (£3,500 - £512)). His contractual wage was £3,350.60.

Dawud is furloughed. His furloughed salary is £2,500 a month (as the furlough pay is subject to a cap). This is his post-sacrifice pay.

His notional pre-sacrifice pay is: [Furlough pay – (sacrifice per cent x lower earnings level)] / 100 per cent - sacrificed per cent]

In April:

Dawud’s notional pre-salary sacrifice pay is:

(£2,500 – (5 per cent x £520)) / 95 per cent = (£2,500 - £26) / 95 per cent = £2,604.21

His employer’s pension contribution is 8 per cent of (£2,604.21 - £520) = £166.74

GHI Marketing can claim an automatic enrolment statutory minimum contribution of:

3 per cent of (£2,500 - £520 ) = £59.40

Dawud’s pension contribution is now £166.74, compared to £238.40 a month if he hadn’t been furloughed.

Pension planning

If the furloughed employee’s salary has been reduced, then it’s likely their pension contributions have also been cut.

Obviously at the moment it will be difficult for many employees to make up the difference in their pension contributions.

They will be facing many financial pressures, especially if their furloughed salary has been cut to 80 per cent, or even less where the cap applies.

Some employees may want to be removed from the salary sacrifice arrangement, so they can reduce their pension contribution to the automatic enrolment minimum or stop altogether, and increase take home pay.

One of the principles of defined contribution pension saving is to save as much as you can as early as you can.

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