Hot topic: Furloughing – pension contributions and salary sacrifice


On 17 April 2020, TPR published DC pension contributions: COVID-19 technical guidance for large employers (“the Guidance”). This was updated on 15 June to reflect changes to the Coronavirus Job Retention Scheme’s (“the CJRS”) conditions, duration and levels of grant – see “The CJRS – in brief” for details of what’s payable under the updated scheme.

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 CJRS.

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 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 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.
  • Any changes made now to salary sacrifice arrangements will not affect the calculation of the reference wage under the CJRS, as this calculation would have been made as at the furloughed worker’s last pay period prior to 19 March 2020.
  • Amounts received under the CJRS (or payable by the employer from 1 September) to cover the furloughed worker’s pay must be paid to them in the form of money. 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, calculating 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, and prorated if the employee works part-time), which HMRC requires must be paid into the pension scheme. (Such payments will come to an end on 1 August.)

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 until the end of July (assuming the employee works full time) 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 (or payable from a combination of the Government grant and their employers from 1 September). 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.