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COVID-19 & Workplace Pensions – do I need to still pay?

We hope that everyone and their family are coping well in the current challenging conditions.

The economic shock from Covid-19 is unique in recent history.  It is a temporary blow to both global supply chains and global demand, where today people who would otherwise be working, earning and consuming, are unable to do so because of restrictions on movement.  Like everyone else, we are hoping the government support being offered is enough to protect businesses, jobs and livelihoods.  

You can find a list of the support available to businesses here.

Accountants, business advisers, financial advisers and banks are well placed to help guide businesses through the options available to them, although in many areas these options are still being worked on.

In the past week, we have received several calls from employers regarding both employee and employer pension contributions to their Workplace Pensions.  Further guidance was published on 26 March regarding the Coronavirus Job Retention Scheme, which made reference to support for Workplace Pension contributions.

The Coronavirus Job Retention Scheme is available to employers who cannot cover staff costs due to COVID-19.  An employer can ‘furlough’ an employee to avoid redundancies and claim a grant to cover the cost of the employee’s salary. To be eligible, when on furlough, an employee can not undertake work for or on behalf of the organisation. This includes providing services or generating revenue. If an employee is working, but on reduced hours, or for reduced pay, they will not be eligible for this scheme.

Employers will continue to pay staff, potentially at a reduced rate as per the limits below and will be liable to pay Employer National Insurance contributions on wages paid, as well as automatic enrolment contributions unless an employee has opted out or has ceased saving into a workplace pension scheme.

Employers can claim for 80% of furloughed employees’ usual monthly wage costs, up to £2,500 a month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that wage.

Once you’ve worked out how much of an employee’s salary you can claim for, you must then work out the amount of Employer National Insurance Contributions and minimum automatic enrolment employer pension contributions you are entitled to claim.

Employer National Insurance Contributions and automatic enrolment contribution on any additional top-up salary (should you choose to pay it) will not be funded through this scheme. Nor will any voluntary automatic enrolment contributions above the minimum employer contribution of 3% based on the employee’s “Qualifying Earnings”.

Qualifying earnings are an employee’s total earnings between £520 and £4,167 each month. This means no pension contributions are payable on earnings below £520 and any earnings above £4,167, for both the employer and employee.

Example 1:  Employee with a gross salary of £20,000 as of 28 February 2020

Employee’s usual gross monthly salary:          £1,666.67

Furloughed monthly salary:                               £1,333.33 (£1,666.67 x 80%)

3% employer pension contribution on qualifying earnings from April 2020: £24.40 (£1,333.33 – £520 x 3%)

Employer National Insurance:  £82.98 (£1,333.33 – £732 x 13.80%)

 The total grant you claim for this individual is £1,440.71 (£1,333.33 + £24.40 + £82.98).

Example 2:  Employee with a gross salary of £45,000 as of 28 February 2020

Employee’s usual gross monthly salary:       £3,750

Furloughed monthly salary:      £2,500                                                                                           

(£2,500 is the maximum you can claim however you can choose to pay the employee more and incur the cost)

3% employer pension contribution on qualifying earnings from April 2020: £59.40 (£2,500 – £520 x 3%)

Employer National Insurance:   £243.98 (£2,500 – £732 x 13.80%)       

The total grant you claim for this individual is £2,803.38 (£2,500 + £59.40 + £243.98).

In both cases should your employer pension contribution be greater than 3% or is payable on the employee’s full salary/earnings, you will still be limited to claiming 3% on the employee’s qualifying earnings.

The employer will incur the cost of the difference. You will also not be able to claim any employer pension contribution or National Insurance on any additional earnings paid above the 80% furloughed salary.  For example in the second example if you chose to pay this employee 80% of their gross salary (£3,000 each month), you will be liable for the additional £500 a month salary plus the associated National Insurance and employer pension contributions on this £500.

Employees will also still need to contribute to the pension scheme, unless they have chosen to opt-out or to cease saving into a workplace pension scheme.

Please note – an employer must not take, or fail to take, any action that results in the employee ceasing to be an active member of a qualifying scheme.  For example, an employer cannot directly/indirectly induce or encourage an employee to leave the Workplace Pension.  This would be a breach of legislation and could incur heavy penalties on the employer.

You should make sure any requests from employees to leave the Workplace Pension are provided voluntarily and you have recorded their request in writing, directly from them.

We would encourage employers to speak to their advisers, providers and The Pensions Regulator should they have any concerns.  It is also important employers are open and transparent with their employees in this challenging time.

As rules evolve, we will be updating companies with what may or may not become possible without compromising legislation.

Many employees will be noticing falls in value in relation to their pension funds considering the falls we have seen in investment markets during this period.  However, it is important to remember that volatility is a common feature of investment markets, and most pensions are invested for a very long period, which helps iron out these types of short-term ups and downs. 

Continuing to make regular contributions to pensions at times like this is usually beneficial as you will be buying investments at a lower price, which will help over the long-term as and when markets recover. 

Please click here for further guidance from the government on the Coronavirus Job Retention Scheme. It is important that you understand all aspects of the scheme and the above only covers our interpretation of the parts which relate to Workplace Pensions. You may also wish to seek further guidance from your accountant and/or your legal adviser.

Ryan Oates APFS BSc
Corporate Services Manager
Chartered Financial Planner
e: ryan@sgcorporateservices.co.uk
t: 01603 760866

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