Now the government portal is live in respect of the Job Retention scheme, it is now clearer how pension contributions should be treated, and the impact in respect of making contributions vs claiming your eligible allowances for your furloughed employees.
For ease, we have created some frequently asked questions followed by some examples:
FREQUENTLY ASKED QUESTIONS
What pension contributions can I claim back on the job retention scheme?
An employer can claim 80% of the employee’s gross reference salary (normally salary as at 19 March 2020) subject to a maximum of £2,500 per month. The employer can also claim for the employer national insurance contributions and minimum automatic enrolment pension contributions payable on that amount. Here’s the important point: The minimum amount is based on qualifying earnings, so if your scheme is set up using a different tier, then this may restrict what you are able to claim from the government. This is demonstrated clearly in the example at the bottom of this article.
What are qualifying earnings?
Qualifying earnings is the name given to a band of earnings that you can use to calculate pension contributions for auto enrolment. For the 2019/20 tax year this is between £6,136 per year (£511.33 per month) and £50,000 a year (£4,166.67 per month). The figures are reviewed every year by the Government.
What other ways may my company workplace pension scheme be set up?
If your workplace pension scheme is not set up via qualifying earnings, it will be set up as one of three tiers, which are based on either an employee’s full basic salary or pensionable earnings. An example of the three possible tiers are provided below:
Note – Most of our clients are set up on tier two and therefore the example at the bottom of this article uses this example vs qualifying earnings:
Tier one and two are based on basic salary and may be set up via salary sacrifice or net relief at source method. Tier three schemes are based on all pensionable earnings (i.e. earnings, commissions, bonuses and overtime etc)
What is the difference between relief at source vs salary sacrifice contributions?
Relief at source means your contributions are taken from your net pay (after your wages are taxed). Then the pension provider automatically claim tax relief for you from HM Revenue & Customs (HMRC), adding the basic tax rate of 20% to your pension contributions.
Salary sacrifice is where an employee sacrifices part of their salary to be paid directly into the pension as a gross amount.
What contributions can my company claim?
Perhaps the easiest way to communicate how the Coronavirus Job Retention Scheme will work in respect of company pension contribution, is to provide some examples and their corresponding implications.
EXAMPLE
For this purpose, we have provided a scenario of how the CJRS would be treated under qualifying earnings vs tier two (basic salary) based on the relief at source method and the salary sacrifice methond.
1.1 Qualifying earnings
- Company scheme is set up on Qualifying earnings at the government minimum requirements of 5% employee contribution and 3% Company contribution.
- The employee in question earns £37,500 per year / £3,125 per month
Adjusted monthly contributions will be:
- Company (3%) – £59.66
- Employee (4%) – £79.54
- Tax relief added (1%) – £19.89
- TOTAL – £159.09
Key Considerations:
- Company – Company contributions will be made in the normal way at 80% of the employees’ qualifying earnings. The full company contribution will be able to be reclaimed via the government CJRS portal.
- Employee – The employee contributions will be adjusted in respect of the furloughed amount they are receiving
1.2 – Basic salary scheme based on relief at source contributions
- Company scheme is set up on tier two basic salary, at the government minimum requirements of 5% employee contribution and 3% Company contribution:
- The employee in question earns £37,500 per year / £3,125 per month
Adjusted monthly contributions will be:
- Company (3%) – £75.00
- Employee net (5%) – £100.00
- Basic rate tax relief – £25.00
- TOTAL – £200.00
Key Considerations:
- Company – Company contributions will be made in the normal way at 80% of the employees’ basic salary. However, the company can only reclaim up to the qualifying earnings amount used in Scenario one – Qualifying earnings. This leaves a shortfall to the company of £15.34
- Employee – The employee contributions will be adjusted in respect of the furloughed amount they are receiving
1.3 – Basic salary scheme (tier two) based on salary sacrifice contributions
- Company scheme is set up on tier two basic salary, at the government minimum requirements of 5% employee contribution and 3% Company contribution.
- The company scheme is set up as a salary sacrifice scheme but choose not to pay the National Insurance saving they make into the employees pension
- The employee in question earns £37,500 per year / £3,125 per month
Adjusted monthly contributions will be:
- Company (3%) – £75.00
- Employee Gross (5%) – £125.00
- NI saving (nil) – £0
- TOTAL – £200.00
Key Considerations:
- Company – Company contributions will be made in the normal way at 80% of the employees’ post sacrifice basic salary. However, the company can only reclaim up to the qualifying earnings amount used in Scenario one – Qualifying earnings. This leaves a shortfall to the company of £15.34. In addition, the company can only reclaim up to 80% of the employees post sacrifice salary which in this example is up to £2,375, leaving an additional shortfall of £125.
- Employee – The employee contributions will be adjusted in respect of the furloughed amount they are receiving
Summary
In respect of the government Coronavirus Job Retention Scheme, the amount companies can reclaim is going to favour those who have set up their scheme on Qualifying earnings. This is understandable given that these are the minimum requirements.
They will least favour companies that have set up their schemes on salary sacrifice arrangements, and especially those companies that are contributing more than the minimum requirements.
These are unprecedented times, and the mere fact that the government is providing such as scheme should be seen as a great help to companies even if your scheme is set up under salary sacrifice, and the relevant shortfalls in question are relatively small in the big picture.
We’re here to help:
Should companies need support with the scheme or if you have any questions in respect of your personal scheme, please contact us at support@cbbenefits.co.uk or 01483 881111 and we’ll be delighted to help.
