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Kirk Rice Blog

Job Retention Scheme (JRS) Impact On Workplace Pension Contributions & Salary SacrificeWritten on April 21, 2020 by Kirk Rice LLP

The Governments JRS is a welcome help for Business’s and of course Employee’s. It is something we have never seen before in the UK although Germany introduced something similar during the 2008/09 Financial Crisis which proved to be successful.

One area of complexity is the interaction of JRS with Pension Contributions & Salary Sacrifice. The latter is a popular method for deducting and making Pension Contributions for employees since Auto Enrolment and Workplace Pensions were introduced.

What is salary sacrifice & what are the benefits?

Salary sacrifice means an employee & employer come to a Contractual Agreement to reduce (sacrifice) an amount of salary equal to the pension contributions the employee wants to make. This has benefits for the employee & employer. Both benefit from a saving in National Insurance (NI) as pension contributions are not subject to NI. The saving for an employee would be 12% if their income is c£45,000 or less, and 2% on any amount above this. For an employer, it is 13.80% on all earnings.

There is an additional benefit for employees who are higher rate taxpayers. If they make personal pension contributions (not salary sacrifice) and they only receive the higher rate tax relief, they are entitled to if they make a claim through self-assessment. It is not unusual for employees to be unaware of this, not claiming it and paying more income tax than they should! Salary sacrifice avoids this as the employer pays the gross salary sacrificed into the employee’s pension.

Has JRS changed my workplace pension duties?

No, your Automatic Enrolment (AE) duties continue to apply as normal, including your re-enrolment and re-declaration duties. This is the case whether your staff are still working or are being furloughed as part of JRS.

Do I have to continue paying pension contributions?

Yes, unless an employee asks to opt out of their workplace pension or reduces their contributions, you and your employees must continue to make the contributions required under the scheme at the correct time.

An employee can choose to reduce their contribution level (if the scheme rules allow this), opt out or cease active membership of the scheme if they decide it is right for them at this time. However, you must not encourage or induce them to choose this option.

Any employee who reduces their contribution below the statutory minimum opts out, or ceases active membership, must be put back into the pension at the next re-enrolment date provided they:

  • Meet the criteria for re-enrolment
  • Opted out or ceased active membership more than 12 months before the re-enrolment date. If they have opted out or ceased active membership within the 12 months before the re-enrolment date, you can choose to re-enrol them, but you do not have to

Any staff contributions you deduct from their wages must be paid to the scheme and not used for any other purpose.

Will JRS pay my employer pension contributions for furloughed employees?

Yes, the government has confirmed that under JRS Employers will be able to make a claim for the statutory minimum employer pension contribution for furloughed employees based on contributions up to the lower of 80% of furloughed worker’s salary/wage or £2,500pm.

If you pay more than the statutory minimum employer pension contribution you must continue to do so (see can I reduce my contributions below), JRS will only cover the statutory minimum.

What is the statutory minimum employer pension contribution, and why would I be paying more?

The statutory minimum employer pension contribution is 3.00% of qualifying earnings. For the 2019/20 tax year, qualifying earnings were from £6,136pa up to £50,000pa. On a monthly basis, this means anyone earning more than £511 must receive a pension contribution on any amount above that but capped at £4,167 of total pay. The maximum statutory monthly pension contribution an employer would pay was £109.66 for someone who earned £4,167 or more.

The qualifying earnings in 2020/21 are £6,240 to £50,000 or £520 to £4,167 monthly. The statutory minimum employer pension contribution has reduced by 27p a month for all because the starting threshold has been raised by £9 a month. The maximum statutory monthly pension contribution an employer will now pay is £109.39.

You may be paying more than the statutory minimum (3.00% of qualifying earnings) for any one or more of the following reasons (there may be others):

  • You value the pension & your employees and have decided to contribute more as you see it as being a good benefit
  • You need to contribute more to compete with other employers in your business sector to attract and retain employees
  • Your contributions are based on ALL salary and not qualifying earnings
  • Employee contributions are made using a salary sacrifice

The last 2 points are likely to be an issue for most employers. In relation to salary sacrifice you may recall from my earlier explanation, that the employer & employee have come to a Contractual Agreement to reduce the employee’s salary.

Can I reduce my contributions to the statutory minimum?

Yes, but not below statutory minimum and there are several points to consider:

  • Your employment contracts and whether any changes are needed if so, it would be sensible to take legal advice
  • Similarly, you may have recognised trade unions or other staff representative forums to discuss and notify changes with
  • The rules of the selected workplace pension and the ability to amend contributions
  • Rules that may apply under pensions legislation that are different from employment law

The first and last two points are probably the most important, and in relation to the first legal advice would be advisable. For the last pensions legislation states employers with at least 50 employees in a pension scheme are legally required to consult with members if they are making changes that decrease employer contributions. You do not need to consult if you have less than 50.

If you have over 50 employees and need to go through the consultation process, the minimum period is 60 days! Not very helpful in the current climate – I think we would all like to think (maybe optimistically) that we would be returning to some semblance of normality in 60 days. However, the pension regulator has stated that they have introduced a regulatory easement until 30th June 2020 and WILL NOT take regulatory action IF all the following apply:

  • You have furloughed staff for whom you are making a claim under the Coronavirus Job Retention Scheme
  • You are proposing to reduce the employer contribution to your defined contribution/money purchase pension scheme in respect of furloughed staff only. For staff who have not been furloughed, the existing pension contribution rate will continue to apply.
  • The reduced contribution rate for furloughed staff will only apply during the furlough period, after which time it will revert to the current rate.
  • You have written to your affected staff and their representatives to describe the intended change and the effects on the scheme and on your furloughed staff.

The Pensions Regulator encourages employers to carry out as much consultation as they can, and indeed this is arguably sensible business practice. Normality will eventually return and hopefully with its business as usual. Employers and their businesses will then benefit from motivated employee’s.

Should an employee & employer agree to opt out of salary sacrifice?

No, an employers JRS claim is linked to an employee’s February 2020 salary and benefits. Salary for this purpose is post salary sacrifice (the reduced value) which means an employer will NOT be able to claim Statutory Minimum Pension reimbursement. This may seem harsh, but it makes sense when you look at some examples. Let’s first look at the cost saving an employee and employer benefit from using Salary Sacrifice:

The following is based on a salary of £2,500pm with an employer pension contribution of 3.00% (£75pm) of ALL salary (better than statutory) and employee pension contribution of 5.00% (£125pm):

1. All Monthly

NO Salary Sacrifice

Salary Sacrificing

Pre-sacrifice salary £2,500 £2,500
Post salary sacrifice salary n/a £2,375
Employer pension contribution 3% £75 £200
Employee pension contribution 5% (4% deduction) £100 Nil
Income tax £292 £267
Employee NI £205 £190
Employer NI £244 £227
EMPLOYEE take home net salary £1,903 £1,918
COST TO EMPLOYER £2,819 £2,802

Salary sacrifice has saved the employer £17pm and employee £15pm.  Government receives £32pm less through lower NI.

The following shows the position if the employee is furloughed and received 80% of their salary.  In this example, the employer has chosen not to maintain pay to 100% of salary and the Pension contributions have been reduced to reflect the reduced furlough pay.

The main point to understand is to calculate the employer pension contribution for the salary sacrifice the employees’ income needs to be increased up to 80% of their salary PRIOR to the Sacrifice.

2. All Monthly

NO Salary Sacrifice

Salary Sacrificing

80% of pre-sacrifice salary (£2,500) £2,000 £2,000
Post salary sacrifice salary n/a £1,900
Employer pension contribution 3% £60 £160
Employee pension contribution 5% (4% deduction) £80 Nil
Income tax £192 £172
Employee NI £145 £133
Employer NI £175 £161
EMPLOYEE take home net salary £1,583 £1,595
COST TO EMPLOYER £2,235 £2,221

Salary sacrifice has saved the employer £14pm and employee £12pm. Government receives £26pm less through lower NI.

The following looks at what an employer can claim under JRS:

3. All Monthly

NO Salary Sacrifice

Salary Sacrificing

Salary £2,000 £1,900
Employer statutory minimum pension contribution (3% of pay less £520) £44 £41
Employer NI £175 £161
TOTAL JRS CLAIM £2,219 £2,102
COST TO EMPLOYER (from table 2 above) £2,235 £2,221
SHORTFALL FUNDED BY EMPLOYER £16 £119

Salary sacrifice saves the employer £17pm in normal conditions and £14 during furloughing. But JRS will only reimburse the statutory minimum pension contribution, which is a lot lower than the employer is paying due to salary sacrifice.  In this example, the extra cost to the employer is £103pm. This is also due to the employer basing contributions on full salary rather than qualifying.

Numbers may have been rounded, and at best provide estimates specific to these examples. These should not be used to check your own payroll or JRS claim.

In practice, an employee may be furloughed part way through a pay period; the pre and post furlough periods need to be calculated.

Payroll processes and pension contributions

Even if you are making a claim under the Coronavirus Job Retention Scheme, your normal payroll process still runs as usual. Deductions such as tax and national insurance contributions as well as pension contributions will continue to be made from your furloughed employees wages and paid as usual. You and your furloughed staff’s pension obligations remain unchanged (subject to earlier comments), and you will still upload the contribution schedules to your pension provider.

This summary has highlighted that the calculation of what the employer pays and what they can reclaim in relation to pension payments is complex due to; salary sacrifice, reduced salary (due to JRS) and the likelihood that employer pension contributions are different to statutory minimum and what they can reclaim under JRS. This is illustrated in my earlier example. The Pension Regulators Technical Guidance also reinforces this and provides 5 quite detailed examples. You can find the guidance including the examples here.

If you want specific advice on this or any related topic, please do not hesitate to contact us.

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