Employers and trustees are at risk of unintentionally breaching regulations if they are unable to correctly calculate pension contributions as the government begins to wind up its furlough scheme.
Accountancy firm RSM and pension provider Aegon have called on employers to make sure they fully understand the implications of not getting the pension calculations correct for furloughed staff to avoid hefty fines.
Under the Coronavirus Job Retention Scheme, set up in March, employers could reclaim 80 per cent of furloughed workers’ wages, capped at £2,500 a month.
In addition, employers could also reclaim their 3 per cent auto-enrolment pension contributions and employer NI contributions (NICs).
However, from this month (August), employers have to start paying their employer auto-enrolment contributions and NICs for furloughed employees.
Pension contributions must now be calculated based on the actual amount of pay received, whether this is furlough pay of 80 per cent, topped up pay, or time worked.
RSM warned if contributions have been incorrectly calculated, this could lead to employers being faced with expensive remedial work to make sure members of the pension scheme have not been disadvantaged in any way.
Legislation allows for 100 per cent penalties for incorrect employer pension contribution claims and recovery of overclaims from employers and directors.
Also, any employer that has mistakenly used salary sacrifice on the furlough grant pay received from HMRC before it then paid the employee will need to correct this by October 20 for claims made before July 22 or within 90 days of any new furlough claim to avoid HMRC penalties, or any possible claims for unlawful deductions from wages.
Karen Tasker, audit partner at RSM, said: “This will become a greater issue as the furlough scheme reaches its end, with reduction of the grant and flexi furloughing adding another layer of complexity.
“This issue is particularly complex when it comes to salary sacrifice arrangements. Some employers may not appreciate that furlough pay should be based on post-sacrifice pay and this is what the government grant will be based on.
“HMRC has confirmed that the full grant should be paid in money to the employee and cannot be used towards benefits provided through salary sacrifice schemes, including pension contributions.”
Meanwhile, Kate Smith, head of pensions at Aegon, said employers must ensure that they reinstate any higher pension contributions if they chose to reduce this during the furlough period.
She said: “Some employers, which previously paid higher pension contributions may have reduced these down to the auto-enrolment minimum for furloughed workers on a temporary basis.
“As ex-furloughed workers return to work, employers are reminded that they must reinstate their higher pension contributions for these workers.
“If employers intend to reduce their pension contributions down to the auto-enrolment minimum for longer, they must carry out a 60 day consultation. Under no circumstances should employers stop paying pension contributions, this is illegal and will attract fines.”
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