Coronavirus: Furloughing – pension contributions and salary sacrifice


On 17 April 2020, TPR published DC pension contributions: COVID-19 technical guidance for large employers (“the Guidance”). Despite the title, the Guidance is of relevance for employers of all sizes who operate salary sacrifice arrangements. It explains how such arrangements interact with the Coronavirus Job Retention Scheme (“the CJRS”). In particular, it:

  • reiterates HMRC’s requirement that the 80% furlough pay grant received under the CJRS must all be paid to employees in the form of money and, as such, salary sacrifice contributions cannot be deducted from that furlough pay
  • also reminds employers that, if not altered, any existing contractual obligations under salary sacrifice arrangements and obligations under pension scheme rules continue to apply as normal.

Therefore, employers wishing to mitigate their pension costs for furloughed employees will need to consider urgently whether they need to adjust their salary sacrifice arrangements and/or pension scheme rules.

Reference above to the grant being 80% of salary or wages is subject to the cap of £2,500 per month that the CJRS will pay in respect of any individual’s salary. In such cases, the NIC and pension contributions under the CJRS will be based on a salary of £2,500.

Salary sacrifice principles

As the Guidance explains, a salary sacrifice arrangement is a contractual agreement between employee and employer, where the worker agrees to give up some of their salary in return for a benefit (in this case, the employer taking over the payment of what otherwise would have been the employee’s contribution). It is usually set up by changing the terms of the worker’s contract of employment by agreement.

The operation of a salary sacrifice arrangement for pension contributions is separate from the auto-enrolment provisions and pension contribution obligations set out in the pension scheme’s rules. Usually though, the scheme rules will oblige the employer to pay the total contribution and, importantly, define pensionable pay as the notional pre-sacrifice pay.

As a general rule, if an employee can swap in and out of the sacrifice arrangement whenever they like, any expected tax and NIC advantages under a salary sacrifice arrangement will not apply. However, arrangements can allow opting in or out in the event of lifestyle changes which significantly alter an employee’s financial circumstances. HMRC has confirmed that changes to circumstances directly arising as a result of the Coronavirus do count for this purpose.

What happens if the salary sacrifice arrangement is not varied?

The Guidance makes the following points:

  • When calculating the grant of 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. However, this is just for the purposes of claiming the grant and what the grant can be used for. It is very likely that, if not varied, the salary sacrifice arrangement and pension scheme rules will still require the employer to contribute on the pre-sacrifice salary.
  • All of the grant received under the CJRS to cover the furloughed worker’s pay must be paid to them in the form of money, so salary sacrifice contributions cannot be deducted from that pay.
  • If pay cannot be reduced then employers must continue to pay furloughed workers their full pay and calculate pension contributions and the salary sacrificed element as usual on this pay.
  • The only contribution the employer will receive from the CJRS towards its pension contribution obligations will be up to 3% of auto-enrolment “qualifying earnings” (based on the 80% of post-sacrifice salary), which HMRC requires must be paid into the pension scheme.

From 6 April 2020, “qualifying earnings” are total earnings between £6,240 and £50,000 (or £520 and £4,166 a month). The maximum pension contribution that can potentially be claimed under the CJRS is therefore £59.40 per month, being 3% of £2,500 – £520 (ie the maximum grant under the CJRS minus the lower qualifying earnings band). (see our Hot Topic).

Amending salary sacrifice arrangements

A number of employers will wish to reduce furloughed staff’s salaries to the 80% grant received from Government. If the employer also wants to reduce their pension contribution, as a percentage of earnings, they can only do so if they do not breach the auto-enrolment requirements. The above is most likely to require agreement with the employee to change employment contract terms. In particular, if contributions are to be reduced to below auto-enrolment levels it will usually be necessary for the employee to opt out of auto-enrolment. Employers must be careful in any communications in this area as it is unlawful to induce a member to opt out.

Employers with at least 50 employees are also legally required to consult with members for a minimum of 60 days if they are making changes that decrease employer contributions. However, due to the current situation, TPR has provided separate guidance to ease regulatory action if the employer fails to consult for the full 60 days subject to certain conditions, the main one being that the employer is only proposing to reduce contributions for furloughed staff to align with the CJRS.

It is also likely that, under most pension schemes’ amendment powers, the employer will need to engage with trustees on making any changes to reflect lower contributions and/or individuals no longer participating in the salary sacrifice arrangements, if the existing scheme rules do not provide sufficient flexibility.


The Guidance provides seven worked examples of the interaction of salary sacrifice arrangements and the CJRS. Example 2 is a striking example of the consequences of not addressing the pension contribution aspects of furloughed employees subject to a salary sacrifice arrangement. In that example

  • Employer contributions – under the pension scheme rules, are 10% of pay before any salary sacrifice
  • Salary sacrifice – under the contract, an employee has sacrificed £100 of pay per month from their annual pay of £24,000
  • Employee’s annual pay is therefore £22,800, plus a £1,200 sacrifice to be paid to the pension scheme (ie £1,900 and £100 per month respectively)
  • Under the CJRS – the employer can claim a grant towards salary of £1,520 (ie 80% of £1,900). The employer has chosen, having regard to contractual requirements, to pay the furloughed employee only that amount (ie £1,520 per month) during the furlough period.
  • But the employer must still pay £160 a month (10% of notional pre-sacrifice pay) under the pension scheme rules. However, it can no longer recover the £100 employee contribution and can only recover approximately £30 through the CJRS (using the 3% of qualifying earnings formula).

Final point

Any changes made now to salary sacrifice arrangements will not affect the calculation of the reference wage under the CJRS, as this calculation is done as at the furloughed worker’s last pay period prior to 19 March.