Last weekend HMRC published revisions to its guidance on the Coronavirus Job Retention Scheme (CJRS), providing further details on the extent to which the HMRC grant would cover the pay and benefits of furloughed employees.

If you are not already familiar with the key features of the CJRS (How many of us had to look up the term “furlough” a few weeks ago?) please refer to the excellent publication “Coronavirus Job Retention Scheme: UK Government Issues Further Guidance” issued by our Labor & Employment team.

The rules regarding the payment of pension contributions for a furloughed employee are still not entirely clear (and we are expecting further guidance, which may influence our interpretation of those rules) but the key elements are set out below.

• An employer can claim a grant from HMRC to cover 80% of a furloughed employee’s wages (capped at £2,500) plus “minimum automatic enrolment employer pension contributions” and employer National Insurance Contributions (NICs) on the subsidised wage.
• If the employer pays top-up salary to the furloughed employee this will not be covered by the HMRC grant (nor will pension contributions or NICs on this top-up salary).
• The CJRS does not change the employee’s underlying rights to pension contributions under the employment contract and/or pension scheme rules and so the employer and employee should continue paying the pension contributions required by the applicable contractual terms and/or scheme rules. This means that:
  • employee contributions should continue to be deducted from the furloughed employee’s pay, at the percentage provided for under the rules/contract terms (unless further statements from the Government indicate that a lower rate should apply);
  • the employer may have to pay higher employer pension contributions than the employer contributions covered by the HMRC grant; and
  • if the contributions are determined as a percentage of pensionable pay, which is defined in such a way that the pensionable pay amount will be lower if the employee’s wages are reduced during the period of furlough, the amount of pension contributions will proportionately reduce.

Of course, it may be possible to make changes to the relevant pension scheme rules and the employment contract. However, this is typically not a straightforward process and the employer would normally be required to consult employees about proposed changes to contribution rates.

The recent updates to the guidance also confirm the following points.

• The “reference salary” that the 80% is applied to should not include the cost of non-monetary benefits provided to the furloughed employee, including taxable Benefits in Kind.
• Benefits provided through salary sacrifice schemes (including pension contributions) that reduce the employee’s taxable pay should not be included in the reference salary.
• HMRC views COVID-19 as a “life event” that could warrant changes to salary sacrifice arrangements, if the relevant employment contract is updated accordingly.

The CJRS has been widely welcomed by employers and employee representative groups and the rules appear relatively straightforward on the surface – but there are some unanswered questions that materialise when these principles are applied in practice.

How is the reference salary calculated if a salary sacrifice scheme is changed?

The guidance indicates that the reference salary is based on the employee’s salary at a specified point in time before 1 March 2020 (for example, for full or part time employees on a salary, it is the employee’s salary as of 28 February 2020). On the face of it, therefore, it is unclear how increasing an employee’s salary for the future by cancelling a salary sacrifice scheme, could retrospectively increase this reference salary amount.

How will the “minimum automatic enrolment employer pension contributions” covered by the HMRC grant be calculated?

The HMRC grant will only cover “minimum automatic enrolment employer pension contributions” on the subsidised wages of the furloughed employee. A previous version of the guidance referred to this minimum contribution being calculated by reference to 3% of income above the lower limit of qualifying earnings. This wording has now been removed and replaced with a link to a web page containing generic information about automatic enrolment contributions. It is unclear, therefore, exactly how the pension contributions covered by the grant will be calculated. This will be particularly problematic if the scheme is a defined benefit scheme, or it is a defined contribution scheme that utilises one of the alternative methods of setting automatic enrolment employer contributions which do not reflect the “3% of income above the lower limit of qualifying earnings” calculation.

There is also a separate issue about the extent to which the HMRC grant will cover employer pension contributions if the employer was not obliged to automatically enrol the furloughed employee. For example, because the employee is under age 22.

HMRC has indicated that the online service that employers can use to apply for the grant will be up and running by the end of April. Answers to technical questions about the operation of the CJRS are therefore likely to emerge over the coming days and weeks as HMRC and the Government race to fill gaps in the guidance. However, as employers are already able to furlough employees, hopefully clarity will be provided sooner rather than later.