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COVID-19 and pension salary sacrifice

5 months ago

This article will:

  • explain how pension contributions are affected by the COVID-19 outbreak, and how employers must continue to pay in contributions for their employees;
  • discuss how salary sacrifice agreements could be affected if employees are furloughed, and their salary reduces as a result, explaining options open to employers and employees to amend salary sacrifice agreements; and
  • show how employers can recalculate the employer pension contribution in cases where employees who have entered a salary sacrifice agreement with their employer are furloughed on reduced pay.

The economic turmoil created by the COVID-19 outbreak has affected all parts of our lives. As well as hitting many employees’ jobs and salaries, it will also cut many people’s pension contributions.

Government grants

As part of its emergency response to the COVID-19 outbreak, under the Coronavirus Job Retention Scheme, the Government will pay up to 80% of the salaries of employees who are temporarily ‘furloughed’, up to a maximum of £2,500 a month (equivalent to £30,000 a year).

The Government grants received by employers also cover employer automatic enrolment pension contributions up to the statutory minimum of 3% of band earnings (between £6,240 and £50,000 for 2020/21). Pensions and furloughed employees.

The Pension Regulator (TPR) has pointed out employers’ obligations to pay pension contributions continue to apply as normal, even if staff are furloughed. If contributions are based on a percentage of salary, and if furloughed salaries are reduced, then the monetary amount of the pension contributions will also fall.

Employees can reduce their contributions (if scheme rules allow this), or they can opt out of pension saving if they decide that is right for them at this time. However, employers must not encourage or induce employees to do this.

If employees choose to reduce their contributions, say to a lower percentage of salary, then the pension scheme rules may allow the employer to also reduce their contributions.

If an employee reduces their contributions below the statutory minimum, opts out or ceases active membership, then they must be re-enrolled back into the pension scheme at the next re-enrolment date (as long as they meet the criteria). However, if the employee stops contributions within the 12 months before the re-enrolment date, then the employer doesn’t have to re-enrol them – although, of course, they could choose to do so.

Salary sacrifice for furloughed employees

Salary sacrifice is where an employee gives up some of their salary in return for a pension contribution by the employer. Usually the employer pays the total pension contribution, including the amount the employee has sacrificed, and in most cases the contribution is based on notional pre-sacrifice pay.

When working out the pension contribution due for a furloughed employee, any salary sacrifice contractual agreement has to apply as normal, but may be affected by the reduction in salary.

If an employer is claiming the Government grant under the Coronavirus Job Retention Scheme, then this is worked out as 80% of the employee’s post-sacrifice salary (not the notional salary).

All of the grant claimed must be paid to a furloughed worker in the form of money. Where there is a salary sacrifice arrangement in place, the employer may need to re-calculate the pension contribution to be paid to the pension scheme, and amend payroll processes.

Under most salary sacrifice agreements, the pension contribution is a percentage of the notional pre-sacrifice salary. Once the employee is furloughed, the employer will know the post-sacrifice furlough pay, but they need to work out the notional pre-sacrifice salary to be able to calculate pension contributions.

All of the Government grant must be paid to the employee. The employer cannot deduct from the furlough pay the amount the furloughed employee would normally sacrifice. Instead, the employer has to pay the total contribution due under the pension scheme. (Although the employer can claim as part of the grant the minimum statutory automatic enrolment employer contribution.)

An employer should first check any contractual obligations they have entered into as part of a salary sacrifice arrangement.

Examples of salary sacrifice for furloughed employees

Under the salary sacrifice contract, the amount sacrificed could be expressed as a set amount or as a percentage of salary. The two following examples show how to work out the pension contributions for a furloughed employee where there is a salary sacrifice agreement in place.

However, salary sacrifice is complex, and different contracts could mean different provisions apply.

Example 1 – sacrifice as an amount

Joe works for ABC Services. His pension scheme has a 10% employer contribution based on Joe’s notional pre-sacrifice pay. Joe has agreed to sacrifice £100 of pay each month as a pension contribution, and that is paid to the pension scheme as part of the overall employer’s pension contribution. He is left with a post-sacrifice salary of £1,900 a month.

Joe is furloughed. His furloughed pay is £1,520 (80% of £1,900).

His pre-sacrifice pay is worked out as: furlough pay / (100% – sacrifice as a % of pay)

His salary sacrifice was £100, which is 5% of his pre-sacrifice salary of £2,000.

Therefore, his pre-sacrifice pay is: £1,520 / 95% = £1,600

The employer’s pension contribution is 10% of the notional pre-sacrifice pay which is £160 a month during the furlough period.

ABC Services can claim a grant to cover the automatic enrolment statutory minimum employer contribution on the furlough pay of £1,520. This is worked out as:

  • £30.24 (3% of £1,520 – £512) for March; and
  • £30.00 (3% of £1,520 – £520) for other months in the furlough period.

Joe’s pension contribution is now £160 a month, compared to £200 a month if he hadn’t been furloughed.

If the amount deducted from the employee under a salary sacrifice arrangement is greater than the amount due as an employer pension contribution, the employer still has to continue paying the higher amount.

Example 2– furlough salary is subject to the cap

Dawud works for GHI Marketing. His pension scheme has an employer contribution of 8% of notional pre-salary sacrifice qualifying earnings. Dawud has agreed to sacrifice 5% of his qualifying earnings as a pension contribution to be paid as part of the overall employer pension contribution.

Dawud’s pre-sacrifice pay is £42,000 a year or £3,500 a month. In February 2020 he sacrificed £149.40 (5% of (£3,500 – £512)). His contractual wage was £3,350.60.

Dawud is furloughed. His furloughed salary is £2,500 a month (as the furlough pay is subject to a cap). This is his post-sacrifice pay.

His notional pre-sacrifice pay is: [Furlough pay – (sacrifice % x lower earnings level)] / 100% – sacrificed %]

In April:

Dawud’s notional pre-salary sacrifice pay is:

  • (£2,500 – (5% x £520)) / 95% = (£2,500 – £26) / 95% = £2,604.21

His employer’s pension contribution is 8% of (£2,604.21 – £520) = £166.74

GHI Marketing can claim an automatic enrolment statutory minimum contribution of:

  • 3% of (£2,500 – £520 ) = £59.40

Dawud’s pension contribution is now £166.74, compared to £238.40 a month if he hadn’t been furloughed.

Pension planning

If the furloughed employee’s salary has been reduced, then it’s likely their pension contributions have also been cut.

Obviously, at the moment, it will be difficult for many employees to make up the difference in their pension contributions. They will be facing many financial pressures, especially if their furloughed salary has been cut to 80%, or even less where the cap applies.

Some employees may want to be removed from the salary sacrifice arrangement, so they can reduce their pension contribution to the automatic enrolment minimum or stop altogether, and increase take home pay.

One of the principles of defined contribution pension saving is to save as much as you can as early as you can. Employees may want to consider making up the missed contributions in due course, once their financial positions become more steady and robust.

Amending salary sacrifice arrangements

HMRC has advised that COVID-19 is classed as a ‘life event’. This means the terms of a salary sacrifice arrangement could be changed if the employment contract is updated accordingly. Written agreement would be needed from all employees.

The pension scheme rules are separate from any salary sacrifice arrangement that is part of a furloughed worker’s contract of employment. If the salary sacrifice arrangement is ended, the pension scheme rules will continue to apply to the employer and no contribution is due from the furloughed employee. (Unless the pension scheme rules cater for employees who do not agree to salary sacrifice.)

If an employer wants to change the pension scheme rules – say to reduce the employer contribution to the 3% automatic enrolment minimum – they will need to consider the usual factors in that decision.

Any changes made to the salary sacrifice arrangement from 19 March 2020 do not affect the calculation of the reference wage when working out the grant under the Coronavirus Job Retention Scheme. This calculation is done as at the furloughed worker’s last pay period before 19 March 2020.

DC certification

Some employers have certified that they can treat their defined contribution scheme as a qualifying scheme because it meets alternative automatic enrolment minimum contribution rates. For example, in cases where the definition of pensionable pay is different from qualifying earnings because it excludes items such as bonuses or overtime.

In these cases, the terms of the pension contributions are unchanged as a result of furloughing employees. The employer and employee should continue to pay the contributions percentage rates as set out in the scheme or the governing documents.


Understanding how pension salary sacrifice agreements and pension contributions are affected when employees are furloughed is an important part of helping employers and employees through this difficult time. However, each salary sacrifice agreement could be different, and it’s key for employers to start by checking their own contractual arrangement with their staff.

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Rachel Vahey

Rachel Vahey

Job Title
Senior Technical Consultant

Rachel is a Senior Technical Consultant helping financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients. She’s well known within the pensions and savings industry, and regularly speaks at AJ Bell events, alongside writing content and articles for our website.

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