Coronavirus and Salary Sacrifice Arrangements

We already know from HMRC that under the Coronavirus Job Retention Scheme (“CJRS”) (see Coronavirus: Job Retention Scheme), the basis on which salary is based, is 80% of monthly salary up to a maximum of £2,500, plus the associated employer National Insurance contributions and pension contributions. There have been outstanding gaps in relation to how this works, in connection with pensions around salary sacrifice, employers who use final salary schemes, and those that use defined contribution schemes, where an alternative quality requirement for automatic enrolment purposes is used i.e. total earnings etc. Earlier in the month, HMRC published further guidance clarifying the position in relation to salary sacrifice arrangements. This guidance applies to all elements of an employee's salary subject to use of salary sacrifice, not just pension arrangements.

What have HMRC said?

The reference to salary being claimed by employers should not include the cost of non-monetary benefits provided to employees, including taxable benefits in kind. Any benefits paid by salary sacrifice, such as pension contributions, are excluded from the reference salary so if, for example, any employee has a £30,000 plan and salary that pays £3,000 per annum into their pension scheme via salary sacrifice the reference salary will only be £27,000.Obviously in this situation, any employee who is in the salary sacrifice arrangement will find themselves at a disadvantage, compared to a colleague who is not in a salary sacrifice arrangement, as the reference salary will be reduced to take into the account the cost of the sacrificed benefits.Helpfully, HMRC has also confirmed that the Coronavirus pandemic counts as a life event, for the purpose of an employee's right to request changes to salary sacrifice arrangements (this is assuming the employment contract has been updated accordingly). However, the pension scheme rules requiring the full contribution from the employer would continue to apply. If an employer wishes to change their pension contribution payment obligations, they may need to undertake a statutory pension consultation and/or an employee consultation.Additionally, the guidance makes it clear that if an employer makes a claim for an employee's salary under the CJRS, all of the grant claimed must be paid to a furloughed worker in the form of money. An employee is therefore not able to sacrifice any of their furlough salary in return for pension contributions, and the obligation remains on the employer to make the total pension contribution.For the purpose of making pension contributions, the salary an employee receives whilst on furlough is to be considered their post-sacrifice pay. Employers will therefore need to calculate their employees' new notional pre-sacrifice pay and continue to make their contractual employer pension contributions on this basis.Employers using salary sacrifice schemes are still able to apply for a grant, to cover the minimum automatic enrolment pension contributions, being 3% of income above the lower limit of qualifying earnings (£512 per month until 5 April 2020 and £520 per month from 6 April 2020 onwards) and below the furlough salary upper limit (the lower of 80% of the reference salary or £2,500 per month).Action pointsAny employer with a salary sacrifice arrangement around pension contributions and/or any other benefits should take the following steps:

  1. Consider whether or not in light of the clarifications from HMRC they are prepared to make up the difference by shouldering the costs of the additional employer contributions.
  2. Review the terms of their salary sacrifice arrangement (salary sacrifice is a variation of the employment contract) and consider whether or not, the existing arrangements are sufficiently wide to allow for employees to use the Coronavirus pandemic as an opt-out reason, in relation to those arrangements.
  3. If the contract is not wide enough it may need to be varied further to allow for employee opt-outs, this may require a statutory pension consultation and/or employee consultation.
  4. If the contract is wide enough, or has been varied to allow the opt-outs, consider a communicating exercise with all impacted employees and how this will be conducted in relation to the furloughing requirements.

An employee in a salary sacrifice arrangement, may need to consider opting-out of the scheme in order to increase their reference salary, for the purposes of calculating furlough salary.

If you would like to talk through the consequences for your business, please email us and one of our team will get in touch.


The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.