Skip to main content

Your browser is out of date, and unable to use many of the features of this website

Please upgrade your browser.

Ignore

This website requires cookies. Your browser currently has cookies disabled.

DC pension contributions: COVID-19 technical guidance for large employers

On this page you will find more technical guidance about interaction between your normal pension contribution calculation and the Job Support Scheme where there is a salary sacrifice arrangement in place.

Please note that this guidance will be more applicable to large employers and their advisers. If you are a smaller employer and this applies to you, you may want to contact your payroll adviser or pension provider for help.

Published: 17 April 2020

Updated: 9 April 2021

We have updated this guidance as the Coronavirus Job Retention Scheme (CJRS) has been extended until 30 September 2021.

Pension contributions and salary sacrifice when using the CJRS

The existence of the grant available under the Coronavirus Job Retention Scheme does not change an employer’s usual pension contribution payment obligations or processes.

When calculating the pension contribution due for a furloughed worker who has agreed a salary sacrifice arrangement for pension contributions, any contractual obligations you have entered into and the obligation in the pension scheme rules continue to apply as normal.

However, as all of the grant claimed must be paid to a furloughed worker in the form of money (March to June 2020) and that the furloughed worker must be paid the lower of 80% of their wages or £2,500 or the pro-rated equivalent if the member of staff is working part-time(after 1 July 2020), this may mean that, where a salary sacrifice arrangement is in place for pensions, an employer will need to amend their payroll processes to calculate the pension contribution to be paid to the pension scheme under the pension scheme rules. We explain this in more detail below.

A salary sacrifice arrangement is a contractual agreement between the staff member and their employer, where the worker agrees to give up some of their salary in return for a benefit such as a pension contribution by the employer. 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 automatic enrolment provisions and pension contribution obligations set out in a pension scheme’s rules or governing documentation. When salary sacrifice is operated then usually, under the pension scheme rules, the obligation on the employer is to pay the total contribution, however it is calculated. In most cases, the scheme rules or governing documentation will define pensionable pay as the notional pre-sacrifice pay. The amount the member of staff sacrifices is paid across to the pension scheme as part of the overall employer contribution. There is no obligation under the pension scheme rules or governing documentation for the member of staff to contribute. See example 1 below as an illustration:

Example 1

The pension scheme rules require a contribution of 10% from the employer on the notional pre-sacrifice pay. Under the contract of employment, the worker has agreed to reduce their contractual salary to £1,781.25 a month in return for a pension contribution of £93.75 to be paid over to the pension scheme as part of the employer contribution.

In February 2020, the employer pension contribution required under the pension scheme rules is £187.50 (10% of the notional pre-sacrifice pay of £1,875). The employer is required to pay their employer pension contribution of £187.50 over to the pension scheme by the agreed due date.

Contractually, under the salary sacrifice arrangement the worker has agreed to sacrifice £93.75 to be paid over to the pension scheme as part of the employer’s total pension contribution of £187.50.

The amount the individual has agreed to sacrifice as a pension contribution may appear on your payroll as an employee pension contribution. For example, for the employer in example 1 above, their payroll may show an employee pension contribution of £93.75 and an employer pension contribution of £93.75. However, it is important to remember that the obligation in the pension scheme rules is for the employer to pay the total contribution, in this case £187.50, and under the pension scheme rules there is no requirement on the individual to pay a pension contribution.

The government’s guidance on the Coronavirus Job Retention Scheme sets out that when calculating 80% (70% in September 2020 and 60% in October 2020) of a furloughed worker’s salary or wage, the reference salary or wage to use is the amount after the salary has been sacrificed. All of the grant received from government to cover the furloughed worker’s pay must be paid to them in the form of money. And, since September 2020, the lower of 80% of their wage or £2,500 (or the pro-rated equivalent if the member of staff is working part-time) must be paid to them. As a result, the lower of 80% of wage or salary or £2,500 (or the pro-rated equivalent if the member of staff is working part-time) during the furlough period should be treated as the post-sacrifice pay so that no further sacrifice is made on that amount.

It is important to note that this is just for the purposes of making a claim for a grant from government and what that grant can be used for. Any contractual obligations you have entered into as part of the salary sacrifice arrangements and the obligation in the pension scheme rules continue to apply as normal, so the first step for an employer is to consider their contractual arrangements.

If, as a result of your contractual arrangements, you cannot reduce pay then you will continue to pay your furloughed workers their full pay and calculate pension contributions and the salary sacrifice element as usual on this pay. If this is the case, you can only claim a grant under the Coronavirus Job Retention Scheme to cover a proportion of your furloughed workers' pay plus the associated employer’s national insurance contribution costs and the employer’s pension contribution up to the level of the AE statutory minimum employer contribution (for claims ending before 1 August 2020) on this proportion.

If you have agreed a reduction in pay with your furloughed worker you may need to make some changes to your payroll processes. Please contact your payroll provider for help and options for how to set up your payroll to assist with this processing. The changes include:

  • usually you know your worker’s notional pre-sacrifice pay, and the pension contributions due under the pension scheme rules or governing documentation are calculated by your payroll system based on this amount. In these circumstances you will know the post sacrifice furlough pay. You will need to work out the notional pre-sacrifice pay in a pay period based on treating the furlough pay as your worker’s post-sacrifice amount. You can then calculate the total employer pension contribution as normal. In examples 2,3 and 4 that follow, you can find out how to calculate the notional pre-sacrifice pay.
  • you cannot deduct the amount your furloughed worker would normally sacrifice in their wage for pension contribution from the furlough pay, as this will mean that the amount you have claimed under the Coronavirus Job Retention Scheme will not have all been paid as money or will be below the lower of 80% of their salary or wage or £2,500 a month (or the pro-rated equivalent if the member of staff is working part-time). This means that you will pay the total contribution due under the pension scheme. You could claim as part of the grant the AE statutory minimum employer contribution on the pay included in the grant (for claims ending before 1 August 2020).
  • if your contractual arrangements with your furloughed worker specify that a set amount will be sacrificed and paid to the pension scheme each pay period, (eg £100) you will continue to pay this amount across as part of the employer contribution. This applies even if this amount is greater than the amount due under the pension scheme rules or governing documentation (see example 5 below).

Example 2 illustrates these changes using a monthly salaried furloughed worker. They have agreed to sacrifice a fixed amount of salary each month as a pension contribution to be paid as part of the overall employer pension contribution.

*Please note examples 2 to 5 are to illustrate the calculation of pension contributions for a furloughed worker with a salary sacrifice arrangement for pensions. The calculations of the reference wage and the grant of 3% of qualifying earnings included in these examples are for illustration purposes only and may not be appropriate for staff being newly furloughed on or after 1 November 2020. See guidance from Government on how to calculate the reference wage and how to calculate the grant.

Example 2

The pension scheme rules require a contribution of 10% from the employer on the notional pre-sacrifice pay. Under the contract of employment, the worker has agreed to sacrifice £100 of pay as a pension contribution to be paid across to the pension scheme as part of the overall employer’s pension contribution. Their contractual salary is £22,800 plus a contribution of £1,200 to be paid over to the pension scheme. This is equivalent to a monthly salary of £1900 and a monthly sacrificed amount of £100.

In February 2020 their contractual wage post sacrifice was £1,900.

The amount of salary that can be claimed under the Coronavirus Job Retention Scheme is 80% of £1,900.00 = £1,520.00. The employer has chosen, after reviewing their contractual arrangements, to pay the furloughed worker £1,520.00 a month during the furlough period.

To calculate the pension contribution on this salary:

The furloughed worker’s pay of £1,520 is to be treated as their post sacrifice pay - ie no further salary sacrifice amount can reduce the pay further.

The notional pre-sacrifice pensionable pay based on treating £1,520 as the post sacrifice pay is £1,600. We have used a formula of Furlough Pay / (100% – Sacrifice as a % of pay).

In this case this is £1,520 / (100% – 5%) = £1,600.

The pension scheme rules require a total contribution from the employer of 10% of this notional pre-sacrifice pay. Therefore, the employer contribution to be paid under the pension scheme rules is £160 a month during the furlough period (this includes the £100 required under the salary sacrifice arrangement to be paid across as part of the overall employer pension contribution).

Under the Coronavirus Job Retention Scheme the employer, for claims ending before 1 August 2020, the employer may claim a grant to cover the AE statutory minimum employer contribution on the furlough pay of £1,520.00. The employer may claim £30.24 (3% of (£1,520.00 - £512 (the lower qualifying earnings threshold for 2019/2020)) for March and £30.00 for April, May, June and July 2020/21 (3% of (£1,520.00 - £520 (the lower qualifying earnings threshold for 2020/2021)) during the furlough period.

For claims starting on or after 1 August 2020, the employer can no longer claim a grant to cover the AE statutory minimum employer contribution on the furlough pay of £1,520.

In September and October 2020, the furlough pay remains at £1,520 a month (as in this example the worker is not working part-time during the furlough period) and the pension contribution due under the pension scheme rules is unchanged. The change in this period is that the amount that the employer may claim in a grant from government in relation to the furlough pay of £1,520, reduces to the lower of 70% of the reference wage or £2,187.50 in September 2020 and the lower of 60% or £1,875 in October 2020. This increases to 80% again from November.

In July 2021 the grant that an employer may claim reduces to the lower of 70% of the reference wage or £2,187.50 (or pro-rated equivalent if the furloughed worker is part time). In August 2021 it reduces to the lower of 60% of the reference wage or £2,187.50 (or pro-rated equivalent if the furloughed worker is part time). You must still pay the worker the lower of 80% of the reference wage or £2,187.50 (or pro-rated equivalent) to be eligible to claim the grant.

In some cases, where you have agreed a reduction in pay with your furloughed worker the contractual arrangement for salary sacrifice may specify a variable amount (see example 3 below).

Example 3

The pension scheme requires a total contribution from the employer of 8% of the notional pre-sacrifice qualifying earnings. Separately, the furloughed worker has agreed to sacrifice 5% of their qualifying earnings as a pension contribution to be paid as part of the overall employer pension contribution. Their pre-sacrifice salary is £24,000 a year or £2,000 a month.

In February 2020 the amount they sacrificed as pension contribution was £74.40 (5% of (£2,000 minus the lower qualifying earnings threshold for 2019/2020 of £512).

As a result, their contractual wage at 28 February 2020 was £1,925.60 a month.

The amount of salary that can be claimed under the grant is 80% of £1925.60 = £1,540.48. The employer has chosen, after reviewing their contractual arrangements, to pay the furloughed worker £1,540.48 a month during the furlough period.

To calculate the pension contribution on this salary:

The furloughed worker’s pay of £1,540.48 is to be treated as their post sacrifice pay - ie no further salary sacrifice amount can reduce the pay further.

The notional pre-sacrifice pensionable pay based on treating £1,540.48 as post sacrifice pay in March 2020 is £1,594.61. We have used a formula of (Furlough Pay – ((sacrifice as percentage of pay) x Lower level of qualifying earnings)) / (100% – Sacrifice as a % of pay). In this case this is £1,540.48 – (5% x £512 the lower qualifying earnings threshold for 2019/20)) / (100% – 5%) = £1,594.61.

The pension scheme rules require a total contribution from the employer of 8% of qualifying earnings based on the notional pre-sacrifice pay.

Therefore, in March the employer contribution to be paid under the pension scheme rules is £86.61 (8% of (£1,594.61 - £512).

Under the Coronavirus Job Retention Scheme, for claims ending before 1 August 2020, the employer may claim a grant to cover the AE statutory minimum employer contribution on the furlough pay of £1,540.48. The employer may claim £30.86 (3% of (£1,540.48 - £512)).

In April, when the qualifying earnings threshold changed for the 2020/2021 tax year, the notional pre-sacrifice pensionable pay based on a post sacrifice salary of £1,540.48 is £1,594.19. We have used a formula of (Furlough Pay – ((sacrifice as percentage of pay) x Lower level of qualifying earnings)) / (100% – Sacrifice as a % of pay). In this case this is £1,540.48 – (5% x £520 the lower qualifying earnings threshold for 2020/21)) / (100% – 5%) = £1,594.19.

Therefore, in April 2020 the employer contribution to be paid under the pension scheme rules is £85.94 (8% of (£1,594.19 - £520).

Under the Coronavirus Job Retention Scheme the employer may claim the AE statutory minimum employer contribution of £30.62 (3% of (£1,540.48 - £520)).

For claims starting on or after 1 August 2020, the employer can no longer claim a grant to cover the AE statutory minimum employer contribution on the furlough pay of £1,540.48.

In September and October 2020, the furlough pay remains at £1,540.48 a month (as in this example the worker is not working part-time during the furlough period) and the pension contribution due under the pension scheme rules is unchanged. The change in this period is that the amount that the employer may claim in a grant from government in relation to the furlough pay of £1,540.48, reduces to 70% of the reference wage in September 2020 and 60% in October 2020, increasing again to 80% in November.

In July 2021 the grant that an employer may claim reduces to the lower of 70% of the reference wage or £2,187.50 (or pro-rated equivalent if the furloughed worker is part time). In August 2021 it reduces to the lower of 60% of the reference wage or £2,187.50 (or pro-rated equivalent if the furloughed worker is part time). You must still pay the worker the lower of 80% of the reference wage or £2,187.50 (or pro-rated equivalent) to be eligible to claim the grant.

If the furloughed worker has agreed to sacrifice salary for other benefits in addition to a pension contribution you may need to include these when working out the notional pre-sacrifice pensionable pay. Again, please contact your payroll provider for help with this calculation.

While examples 2 and 3 uses a monthly pay period, the principle is the same for different pay frequencies. For example, if your furloughed staff are paid weekly you will calculate the weekly pension contribution due under the pension scheme rules or governing documentation using the weekly notional pre-sacrifice pay.

The same principle also applies when the furlough pay has been capped at £2,500 (see example 4 below).

Example 4

The pension scheme requires a total contribution from the employer of 8% of the notional pre-sacrifice qualifying earnings. Separately, the furloughed worker has agreed to sacrifice 5% of their qualifying earnings as pension. Their pre-sacrifice salary is £42,000 a year or £3,500 a month. The amount they sacrifice as a pension contribution to be paid as part of the overall employer contribution is 5% of (£3,500 – the lower earnings threshold for 2019/20 of £512) = £149.40.

Their contractual wage at 28 February 2020 was £3,350.60 a month. 80% of this is £2,680.48. As this is above the cap of £2,500 a month the amount of salary that can be claimed under the grant is = £2,500. The employer chooses to pay the worker to the cap - ie £2,500 per month.

To calculate the pension contribution on this salary:

The furloughed worker’s pay of £2,500 is to be treated as their post-sacrifice pay - ie no further salary sacrifice amount can reduce the pay further.

The notional pre-sacrifice pensionable pay based on this amount in March 2020 is £2,604.63. We have used a formula of (Furlough Pay – ((sacrifice as percentage of pay) x Lower level of qualifying earnings)) / (100% – Sacrifice as a % of pay). In this case this is £2,500 – (5% x £512 the lower qualifying earnings threshold for 2019/20)) / (100% – 5%) = £2,604.63.

The pension scheme rules require a total contribution from the employer of 8% of qualifying earnings based on the notional pre-sacrifice pay.

Therefore, in March the employer contribution to be paid under the pension scheme rules is £167.41 (8% of (£2,604.63 - £512).

Under the Coronavirus Job Retention Scheme, for claims ending before 1 August 2020, the employer may claim a grant to cover the AE statutory minimum employer contribution on the furlough pay of £2,500. The employer may claim £59.64 (3% of (£2,500- £512)).

In April, when the qualifying earnings threshold changed for the 2020/2021 tax year, the notional pre-sacrifice pensionable pay based on a post-sacrifice salary of £2,500 is £2,604.21. We have used a formula of (Furlough Pay – ((sacrifice as percentage of pay) x Lower level of qualifying earnings)) / (100% – Sacrifice as a % of pay). In this case this is £1,540.48 – (5/% x £520 the lower qualifying earnings threshold for 2020/21)) / (100% – 5%) = £2,604.21.

Therefore, in April 2020 the employer contribution to be paid under the pension scheme rules is £166.74 (8% of (£2,604.21 - £520).

Under the Coronavirus Job Retention Scheme the employer may claim the statutory minimum employer contribution of £59.40 (3% of (£2,500 - £520)).

For claims starting on or after 1 August 2020 the employer can no longer claim a grant to cover the AE statutory minimum employer contribution on the furlough pay of £2,500.

In September and October 2020, the furlough pay remains at £2,500 a month (as in this example the worker is not working part-time during the furlough period) and the pension contribution due under the pension scheme rules is unchanged. The change in this period is that the amount that the employer may claim in a grant from government in relation to the furlough pay of £2,500, reduces to the lower of 70% of the reference wage or £2,187.50 in September 2020 and the lower of 60% or £1,875 in October 2020 and increasing to 80% in November.

In July 2021 the grant that an employer may claim reduces to the lower of 70% of the reference wage or £2,187.50 (or pro-rated equivalent if the furloughed worker is part time). In August 2021 it reduces to the lower of 60% of the reference wage or £2,187.50 (or pro-rated equivalent if the furloughed worker is part time). You must still pay the worker the lower of 80% of the reference wage or £2,187.50 (or pro-rated equivalent) to be eligible to claim the grant.

If your contractual arrangements with your furloughed worker specify that a set amount will be sacrificed and paid to the pension scheme each pay period, (eg £100) you will continue to pay this amount across as part of the employer contribution (see example 5 below).

Example 5

The pension scheme rules require a contribution of 9% from the employer on the notional pre-sacrifice pay. Under the contract of employment, the worker has agreed to sacrifice 5% of pay as a pension contribution to be paid across to the pension scheme as part of the overall employer’s pension contribution. Their contractual salary is specified as £4,750 a month salary plus £250 a month to be paid over to the pension scheme as part of the overall employer pension contribution.

Their contractual wage at 28 February 2020 was £4,750 a month. 80% of this is £3,800. As this is above the cap of £2,500 a month the amount of salary that can be claimed under the grant is £2,500. The employer chooses to pay the worker to the cap - ie £2,500 per month.

To calculate the pension contribution on this salary:

The furloughed worker’s pay of £2,500 is to be treated as their post-sacrifice pay - ie no further salary sacrifice amount can reduce the pay further.

The notional pre-sacrifice pensionable pay based on this amount in March 2020 is £2,631.58. We have used a formula of Furlough Pay / (100% – Sacrifice as a % of pay). In this case this is £2,500 / (100% – 5%) = £2,631.58.

The pension scheme rules require a total contribution from the employer of 9% of this notional pre-sacrifice pay. The employer contribution under the pension scheme rules is £236.85 a month during the furlough period. However, the employer’s contractual arrangements specify that £250 is to be paid across to the pension scheme as part of the contribution. Therefore, the total contribution to be paid across to the pension scheme by the employer is £250 a month during the furlough period.

Under the Coronavirus Job Retention Scheme, for claims ending before 1 August 2020, the employer may claim a grant to cover the AE statutory minimum employer contribution on the furlough pay of £2,500. The employer may claim £59.64 (3% of (£2,500- £512 (the lower qualifying earnings threshold for 2019/2020)) for March and £59.40 (3% of (£2,500 - £520 the lower qualifying earnings threshold for 2020/2021)) for each month in 2020/21 during the furlough period.

For claims starting on or after 1 August 2020 the employer can no longer claim a grant to cover the AE statutory minimum employer contribution on the furlough pay of £2,500.

In September and October 2020, the furlough pay remains at £2,500 a month (as in this example the worker is not working part-time during the furlough period) and the pension contribution due under the pension scheme rules is unchanged. The change in this period is that the amount that the employer may claim in a grant from government in relation to the furlough pay of £2,500, reduces to the lower of 70% of the reference wage or £2,187.50 in September 2020 and the lower of 60% or £1,875 in October 2020 and 80% in November.

In July 2021 the grant that an employer may claim reduces to the lower of 70% of the reference wage or £2,187.50 (or pro-rated equivalent if the furloughed worker is part time). In August 2021 it reduces to the lower of 60% of the reference wage or £2,187.50 (or pro-rated equivalent if the furloughed worker is part time). You must still pay the worker the lower of 80% of the reference wage or £2,187.50 (or pro-rated equivalent) to be eligible to claim the grant.

Amending salary sacrifice arrangements

HMRC has advised that COVID-19 counts as a life event, meaning that the terms of a salary sacrifice arrangement could be changed, if the relevant employment contract is updated accordingly with agreement. The pension scheme rules are separate from any salary sacrifice arrangement that is part of a furloughed worker’s contract of employment. As above, the obligation in these pension scheme rules is for the employer to pay the total contribution. If the salary sacrifice arrangement is ended these pension scheme rules will continue to apply to the employer, and no contribution will be due from the furloughed worker, unless the rules cater for workers who do not agree to salary sacrifice.

If an employer wishes to change the pension contribution payment obligation in the pension scheme rules or governing documentation to reduce the contribution that they pay, they will need to consider the same factors listed earlier in the section on employers wishing to reduce their pension contribution to the AE statutory minimum employer contribution. In addition, employers with at least 50 employees are legally required to consult if they wish to introduce member contributions for the first time, or increase existing contributions.

Any changes made to the salary sacrifice arrangement from 19 March 2020 do not affect the calculation of the reference wage. This calculation is done as at the furloughed worker’s last pay period prior to 19 March 2020.

Working while on furlough

From 1 July 2020, staff on furlough will be able to work for you for part of the furlough period. You will have agreed how many hours your member of staff will work for you and the pay for these hours. HMRC provides detailed guidance, including examples of how to work out the furlough pay to be paid alongside. When working out the furlough pay. the previously agreed furlough pay (ie the lower of 80% of their wages or £2,500 a month) will be adjusted proportionately.

In each pay period, you will calculate the total pay (pay for hours worked plus adjusted furlough pay) and pay this through your normal payroll process using this total amount of pay. You will calculate staff and employer pension contributions as normal on this amount of pay.

It is important to remember that under the rules of the Coronavirus Job Retention Scheme, pay cannot be reduced below the lower of 80% of their wages or £2,500 a month (or the pro-rated equivalent if your member of staff is working for you part of the time). It may be possible to operate salary sacrifice as normal if the amount of pay above the furlough pay is sufficient. For example, a worker has a salary sacrifice arrangement in place to sacrifice £50 a week to be paid as a pension contribution. Their total pay in a week is £150, made up of £80 for the period they were working whilst on furlough and £70 furlough pay. Their pay cannot be reduced below £70, so depending upon the contractual agreements between the employer and the member of staff during the furlough period the £50 sacrifice may be made.

If the amount of pay above the furlough pay is not sufficient, for example the staff member’s total pay in the example above was £100 in the week, then whether or not part of the sacrifice can be made (£30 instead of £50 in this example) will depend on the contractual agreement in place between the employer and their member of staff.

This is a similar situation to the interaction between salary sacrifice and National Minimum Wage (NMW)/National Living Wage (NLW), where a salary sacrifice arrangement cannot reduce pay below the NMW/NLW level.