Coronavirus Job Retention Scheme & Pension Contributions

So, if you’re an employer and you’re looking to take advantage of the CJRS then you need to be aware of the implications on your Auto Enrolment Pension (Workplace Pension) scheme and contribution levels for those furloughed.

As an adviser to numerous businesses over the years that I helped prepare for and navigate their way through the Auto Enrolment legislation that started back as long ago as October 2012 I’m fully aware of the headache employers across the nation had when they needed to prepare for and then implement their compliance with those regulations. For some that led to the creation and implementation of a brand-new pension scheme and for others to adapt an existing scheme to comply with the ‘new rules’. What both has in common was to determine the ‘earnings basis’ that they wished to use for the scheme. Would they use the new Qualifying Earnings, being contributions based upon a band of earnings rather than from pound one of salary, or would they use the more traditional route of say Basic Salary.

Let us revisit the contributions levels needed, especially now that we’ve had the full phasing in of the increased contributions since April 2019.

So for those that decided to go the traditional route of say Basic Salary, and assuming that they aren’t paying any enhancement to the statutory requirements, they as an employer would now be paying in 3% of their eligible staff member’s salary to the pension scheme, with the employee contributing 5% of their gross salary.

If instead they opted for the Qualifying Earnings definition, then the same percentages apply but not from pound one, but from a lower earning threshold of £6,240. So, if you have a member of staff earning say £25,000 gross then your employer contribution is 3% of the £18,760 earnings in excess of the threshold of £6,240. In the same way the employee contribution is based on their earnings above this same starting point. This definition also has an upper limit too which is £50,000 so for high earners with a salary over £50,000 there are no employer or employee contributions required for earnings over this level.
So, you can see that the employer contributions for those that chose the Qualifying Earnings route are lower by some £187.20 per annum (£6,240 x 3%).

What has this to do with Coronavirus and the Job Retention Scheme? Well it is suggested that an employer who decides to furlough members of their staff are required to continue to comply with Auto Enrolment rules, so pension contributions are still needed, based upon the amount being paid to them, i.e. the £2,500 cap or 80% of their assessed earnings, or higher for those whose employers have decided to top it up to a higher amount.

Take a look at the government website here https://www.gov.uk/guidance/claim-for-wage-costs-through-the-coronavirus-job-retention-scheme

The scheme allows the employer to reclaim (how is yet to be determined) the amount of up to £2,500 plus employer national insurance contributions upon that amount and employer paid pension contributions of 3% but only using the Qualifying Earnings definition. Therefore, for those companies who use any other basis, e.g. Basic Salary, they are required under Workplace Pension legislation to continue to make the employer paid pension contributions at the 3% level, but they will have to fund the difference.

Could an employer alter the basis of the scheme contribution levels? They could but this would likely constitute a change to their terms and conditions of employment so would require a period of negotiation with staff.
If you operate a salary sacrifice scheme you are advised to take tax advice from your accountant or payroll provider to determine the position here.

If you have a scheme but are not getting support at this time from your current adviser, or you don’t have an adviser at all and feel that the above highlights one good reason to engage with one, then feel free to contact me to discuss whether you would benefit from a free ‘Workplace Pension Scheme Review’.

All the best.