The Job Retention Scheme (JRS) has provided grants for more than 8 million employees with the Government funding 80 per cent of wages, associated employer national insurance costs and auto enrolment pension contributions on earnings up to £2,500 per month, an equivalent annual pre-furlough salary of £37,500.
For employers who offer their pension via a net pay method or relief at source, the application of the JRS grant to the pension scheme is straightforward. The issues for them are whether they pay any extra contractual employer pension contribution above the 3 per cent of band earnings between £520 and £2,500 per month provided by the grant. For those schemes which operate on a salary sacrifice basis there are more complex issues and costs for employers to consider.
Employers can reduce the value of their pension contribution for furloughed staff to the qualifying earnings definition, namely 3 per cent of the furlough grant minus £520 per month, without having to consult affected employees, regardless of how many staff they employ. They need to tell them though, and the reduction in employer contribution must only apply to furloughed staff for the duration of their furlough.
Where an employer has furloughed only part of their workforce, pension payments for non -furloughed staff must remain unaltered. Should an employer wish to make changes to their scheme, affecting 50 or more staff, a 60-day consultation period would be required.
Salary sacrifice is popular with employers and employees, it saves the employer National Insurance of 13.8 per cent of the sacrificed amount, while basic rate taxpaying employees save 12 per cent, higher and top rate taxpayers 2 per cent, together with tax exemption on the employer contribution. The only groups of employees disadvantaged by or unable to use salary sacrifice are lower earning employees who are non- taxpayers and miss out on potential 20 per cent tax relief on their savings or employees on the national minimum wage who are not permitted to choose to reduce their taxable income to below this level. Employers can resolve this by running a relief at source scheme for lower earners alongside their salary sacrifice scheme.
As pension savings paid using salary sacrifice are in effect employer contributions, the employer must fund the percentage of salary the employee sacrificed and cannot net off the 80 per cent of salary grant received from the JRS to fund this. The rules around the JRS state that all payments must be passed on to the employee. Any employer which did not do so would be subject to scrutiny from HMRC which has said that it will investigate and prosecute any misuse of the scheme.
HMRC have ruled that employees can use being furloughed as an acceptable ‘life event’ reason to stop using salary sacrifice, temporarily or permanently. However, as it’s not clear that employers can unilaterally compel employees to leave a salary sacrifice scheme, employees who understand that the rules effectively gift them the value of their previously self-funded pension contribution may be reluctant to stop using salary sacrifice.
Auto Enrolment Pension Grant
If employees choose to stop paying their contributions, or reduce them to lower than the statutory minima, they are opting out of automatic enrolment. As such employers’ mandatory pension liabilities also stop, so the 3% auto enrolment grant should not be claimed through the JRS. It is also important that employers do not encourage employees to leave the scheme as this could lead to enforcement action and fines from the Pensions Regulator.
Where employees choose to opt out, employers are not obliged to allow them to re-join the scheme within 12 months of opting out. However, where employees have been forced to leave the scheme due to financial hardship, as a result of reduced pay, it would be considered good practice to waive this obstacle once they return to full time work and wish to re-join.
In May Chancellor Rishi Sunak announced that the furlough scheme would be extended beyond its original 3 months, which would have ended in June. From August employers will be expected to fund part of the furlough pay and will also be able to employ furloughed staff for some of their time. The exact details of how this will work are expected to be published by the Treasury shortly. This is likely to include further complexity for the payment of pension contributions, especially for employers using salary sacrifice schemes.
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