In these unprecedented times businesses and individuals alike will be looking at all options to stay positive and keep their businesses and personal finances going.
The government has stepped in to provide a number of new measures to assist businesses during the current health crisis, including a way of keeping staff on, even if they are unable to work as normal, known as the Coronavirus Job Retention Scheme (JRS).
This new scheme enables employers to furlough (or retain) workers for a minimum period of three weeks if their business is unable to provide the employee with sufficient work, or if the employee cannot fulfil their role by working from home.
Furloughing an employee through JRS means they can be retained by their employer and the government then contributes 80% of their salary subject to a cap of £2,500 gross per month. The scheme also covers the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions. The employee’s contract remains in force and they are still entitled to their normal employee benefits, however they are not allowed to undertake any work for the employer or anyone else.
It is important to remember that the minimum automatic enrolment employer pension contribution is based on the Qualifying Earning basis of Automatic Enrolment, which is the name given to a band of earnings that the employer uses to calculate contributions.
For the 2020/21 tax year this means the first £6,240 (lower earnings threshold) of earnings isn’t included in the pension contribution calculation and is capped at £50,000. As an example, if a worker has a salary of £16,240 their qualifying earnings would be £10,000 and the employer would pay 3% (£300) of this figure with the employee paying 5% (£500).
If the employer’s scheme is certified on a different basis to this the government will not cover additional employer pension costs.
Detailed below is a table of alternative pay definitions and the contribution level payable by the employer based on a total workforce payroll of £1,624m which has been reduced by 80% because of the Job Retention Scheme, and so now stands at £324,800. It assumes all employees earn less than £50,000 and a minimum of £16,240, with the employer paying the minimum contribution level.
|Definition||Employer Contribution||Employer Contribution per month|
|SET 1 – Contributions based on basic pay||4%||£5,413.33|
|SET 2 – Pensionable pay must be at least equal to basic pay and constitute at least 85% of all earnings||3%||£4,060.00|
|SET 3 – Contributions are based on all earnings||4%||£54,13.33|
In this example the employer will be able to reclaim £2,500.00 per month toward the cost of employer pension contributions.
If the employer’s scheme is certified under SET 1, the employer will be liable for the difference between £5413.33 and £2500.00 which is £2913.33 per month. This means the government is reducing the cost of pension provision by circa 46% to assist the employer.
The contribution basis used by employers may vary to above depending on how they chose to set up their scheme.
Some employees may be considering opting out of their workplace pension whilst they are furloughed, but this may not save them as much as they might expect.
The example below is based on an employee who earns £2000 per month (£24,000 a year) with an employer pension contribution of 5% and an employee pension contribution of 3% with contribution through ‘Salary Exchange’.
The first point to note is that by opting out of their workplace pension the employee will automatically lose the employer’s contribution – effectively taking a 5% voluntary pay cut.
Secondly, the employee is now converting their 3% employee pension contribution to income, which is now subject to tax and National Insurance.
So, the employee gains an increase in their monthly gross pay of £60.00 (3% contribution through Salary Exchange) but this sum is now subject to Tax and National Insurance – so their net income would increase by £40.80 per month. However, they would also lose their employer’s contribution of £100.00 per month.
Therefore, to gain an extra monthly £40.80 in the employee’s pocket they would forgo a total monthly pension contribution of £160.00.
Employers must not actively encourage their staff to opt out of their workplace pension (which could be considered an inducement). Any decision to opt out must be taken freely by the staff member without influence from the employer. Whether or not they decide to furlough their staff, an employer is required to comply with automatic enrolment legislation.
Difficult times require difficult decisions, however pensions are a long-term investment for a person’s future financial provision which should, if affordable be maintained.