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Why Salary Sacrifice is Causing So Much Confusion for Furlough Payments?

Salary sacrifice pension scheme (now known as salary exchange) involves an employee ‘giving up’ (sacrificing) some of their salary in exchange for their employer making a contribution into the employees pension pot (in addition to the usual employer contribution).

Why are Furlough Payments Causing Confusion?

The government introduced the Job Retention Scheme (JRS) to allow employers impacted by COVID-19 to claim back 80% of the ‘normal’ employee wages along with employer national insurance costs and minimum employer auto-enrolment costs.

The ‘normal wage’ is calculated as the taxable pay excluding any ‘benefits’ including those processed via salary sacrifice (including pension). This means that the reference pay used when calculating an employees ‘normal salary’ should be their salary after salary sacrifice pay elements have been deducted (we’ve covered what other pay elements to exclude in an earlier blog).

However, any payment claimed via the JRS MUST be used to pay the employee. This means an employer cannot ‘sacrifice’ a furlough payment to exchange for pension contribution. (If you’re not using salary exchange you can deduct employee pension contributions from furlough payments). But as you have a contractual agreement you still need to maintain your usual pension contributions (**unless you change your agreement which we will come to later).

 What Does This Mean for Payroll?

When running payroll for workers with a salary exchange pension scheme you will need to work out their notional pre-salary exchange salary.

We’ve created a simple excel spreadsheet to help automate these calculations. To download a copy click here.

Let’s assume for simplicity that pension contributions are payable on all earnings prior to any other salary sacrifice arrangements. Your employee contribution 5%. Your furlough payment is the maximum allowed of £2500.

The notional pre-exchange salary would be furlough payment / (100%- employee % contribution).

In this case £2500 / (100%-5%) = £2500 / 95% = £2631.58.

When running payroll we are setting up 2 pay elements to assist with reporting for reclaim calculations;

Furlough payment £2500.

Furlough pension uplift £131.58.

How Much Can you Reclaim Back via the Job Retention Scheme (JRS)?

Let’s take an example of an individual at the capped £2500 with a salary exchange pension scheme in place at 5% Employee contribution matched by ER at 5% where ERNI saving on employee’s salary exchange is added on to the pension contributions;

Total Cost = £3043.46 (see breakdown below for full calculations)

  • £2500 furlough
  • £131.58 uplift to cover salary exchange pension
  • £262.14 ERNI
  • £131.58 Employer Pension contribution
  • £18.16 ERNI saving from employee sacrificed pension

Amount you can reclaim under JRS = £2808.43.

  • £2500 furlough
  • £249.03 ERNI
  • £59.40 Employer pension

This is a shortfall of £235.03 per month. This cost will have to be covered by the employer despite only paying the employee the 80% of normal wages.

Care and caution need to be taken when preparing payroll for furloughed workers within a salary sacrifice scheme. We are offering free advice sessions on Wednesday afternoons. Get in touch to book yours now.

Full calculations;

80% of normal wages up to a maximum of £2500 per month per employee – in this case £2500

ERNI on the furlough payment. In this case we have uplifted the pay so will need to use the following calculation;

Total ERNI / number calendar of days in pay period x number of calendar days in furlough period x proportion of furlough pay to pay during furlough period

Employers NI from payroll / 30 days in April Pay Period x 30 days in furlough period x (2500/2631.58)

= £262.14 /30 x 30 x 95%

= £262.14 / 30 x 30 x 95%

= £249.03 ERNI can be reclaimed back (**assuming you have not used the Employment Allowance to offset this cost).

Pension Reclaim

Pensions can only be reclaimed on the minimum auto-enrolment contributions based on the furlough payment (the uplift for pension is excluded). Here a proportion lower earnings limit (LEL – earnings below this are non-pensionable using qualifying earnings) is given to the furlough payment to allow you to manually calculate the pension reclaim.

(Furlough payment of £2500 – (LEL of £520 / 30 pay period days x 30 furlough days) ) x 3%

= £59.40