An important but, perhaps, overlooked statement in the guidance regarding the Coronavirus Job Retention Scheme (CJRS) is the line: "Where the employer provides benefits to furloughed employees, including through a salary sacrifice scheme, these benefits should be in addition to the wages that must be paid under the terms of the Job Retention Scheme"

This is included in the legislation as:

No claim under CJRS may include amounts of specified benefits payable or liable to be payable in respect of an employee (whether or not a claim to the relevant specified benefit is actually made) during the employee’s period of furlough and the gross amount of earnings falling for reimbursement as described in paragraph 8.2 must be correspondingly reduced

(Paragraph 8.2 talks about the reclaim grants being the maximum of £2,500 per month and employer NICs on this and minimum AE contributions)

I want to talk about two of the common types of salary sacrifice operated in the payroll department for employers.  However, the concept should be adapted for others, for example, cycle to work and workplace parking.

Pension Salary Sacrifice

Essentially, what the above is saying is that a salary reduction as a result of a salary sacrifice reduces the contractual salary (which we already know).  The reference salary (i.e. the pre 80% reduction salary) is this reduced salary.  For example:

An employee has a salary of £2,000.00 per month.  He agrees to sacrifice 5% and this forms an increased pension contribution, payable by the employer to the pension scheme (£100.00).  Whilst the salary is £2,000.00, the contractual agreement reduces this to £1,900.00, i.e. £2,000.00 – £100.00.  £1,900.00 becomes the employee’s new contractual salary.

The Gov.UK guidance and legislation says that when calculating a furloughed salary, the minimum that can be paid is 80% of the ‘reference salary’.  The reference salary is the contractual salary after any salary sacrifice arrangement that may exist.  For example:

The above employee agrees to be furloughed by their employer.  He will be paid 80% of his reference salary.  The employer calculates this as follows:

 Reference salary £1,900.00 x 80%

  • Furloughed salary £1,520.00

If the employer is claiming for the furloughed salary under the UK Government’s Coronavirus Job Retention Scheme (CJRS), the furloughed employee must receive the full amount.  No further reduction can be made in terms of a salary sacrifice as, effectively, the furloughed salary is post-sacrifice salary already.  Put another way, the employer cannot reduce a furloughed employee’s pay below 80% of the reference salary.

Therefore, if the revised furloughed contract says £1,520 and 5% employer contribution by salary sacrifice, the employer will either have to:

  • Gross-up £1,520 (£1,520 / 95%) to come to £1,600. Then it appears on the payslip £1,600 top line and £80 reduction (5% of £1,600) = £1,520 OR
  • Pay £1,520 but not make any sal sac reduction from the employee. If they do, they are reducing the 80% minimum that must be paid to the employee whilst on furlough

Either way, the employer will still end up making the £80 payment to the pension scheme.  This is the contractual agreement that they have made with the employer and this continues.  The importance is to show it correctly on the payslip in the way that employers operate now.

The Pensions Regulator has provided ‘COVID-19 technical guidance for large employers’ on their Website.  I have ‘pinched’ their example 2 to use for my example above.

Childcare Vouchers

The same principle applies with other salary sacrifice reductions, like Childcare Vouchers.  For example:

An employee is on £3,000 per month and has agreed to have a salary sacrifice reduction of £243 for Childcare Vouchers.  His contractual salary is £2,757.00 per month (£3,000.00 – £243.00).  This exists as £2,757.00, as the employee has agreed to contractually reduce his salary in exchange for a benefit (the vouchers).

An agreement is reached to furlough the employee and he will receive 80%.  The calculation is based on his reference salary, i.e. the salary after the sacrifice reduction.  He will be paid £2,205.60 per month.  Unless there has been a contractual change, the furloughed employee is also entitled to receive the £243.00 Childcare Vouchers. 

However, the £2,205.60 is treated as their post-sacrifice pay.  Therefore, no further deductions can be made from this.  If the employer is claiming for the furloughed salary under the UK Government’s Coronavirus Job Retention Scheme (CJRS), the furloughed employee must receive the full amount, as a condition of the CJRS is that the pay that paid cannot be less than the pay that is claimed (via HMRC).

So, if the employer intends to claim £2,205.60 under the CJRS as the pay grant and the employee still wants to provide the benefit of £243 in CCVs as per the contractual agreement, this will have to be processed in the payroll as follows:

  • Add £243.00 to the reference salary £2,205.60 to give a top line salary of £2,448.60. Then, make the £243 reduction which comes to £2,205.60, or
  • Pay £2,205.60 but not make any sal sac reduction from the employee. If they do, they are reducing the 80% minimum that must be paid to the employee whilst on furlough

Be aware that increasing the gross pay may increase the pay on which pension contributions are payable.  Ceasing the sacrifice reduction on the payslip may be the better option.  Note that the employee has still purchased the CCVs, they must be given or the provider’s invoice settled and this is an employer cost.

Ending Salary Sacrifice

There are some salary sacrifice reduction agreements that can be ended immediately such as CCVs, pensions, provision of cycles and cyclist’s safety equipment (e.g. cycle-to-work schemes) and car parking.  This is regardless of the fact that they may not have been in place for the usual 12 months.  These are schemes where there is no charge to Income Tax anyway and, in theory and by agreement, an employee can be in the scheme for one month, stop for one month, start the next etc.

There are others that are subject to the Heaton v Bell principle and it is not possible for an agreement to be reached to switch in and out of salary sacrifice reductions.  This is with the exception of ‘lifestyle events’ which can change the terms of a salary sacrifice arrangement or bring it to an end ahead of the normal minimum period of 12 months.  COVID-19 has been classified a lifestyle event by HMRC.  This means that the employee can say that they have been subject to a lifestyle event (such as ‘changes to circumstances directly arising as a result of coronavirus (COVID-19)’) and come out of the reduction agreement.

An important concept here is that an amendment or revocation of an agreement cannot be made retrospectively – e.g. done in April to take effect from March.  Also, it has to be done by mutual agreement between employee and employer, as this is a contractual change.

Implications with the CJRS

If the salary sacrifice reduction is amended, it actually makes no difference to the reclaim for salaried employees, as the 80% salary would be based on the salary in place in February 2020 (or before 19 March according to the latest guidance).

So, assume that you have contractually only agreed to pay 80% of their salary based on whatever period.  If there is a mutual agreement to end the salary sacrifice in April 2020, in ‘normal’ times, this would inflate the contractual salary.  In terms of the above examples:

  • There would be no salary sacrifice for increased employer pension contributions
  • There would be no salary sacrifice in place for the CCVs

However, in these unprecedented times, unless there is a mutual contractual agreement to pay over and above the 80% furlough agreement, the employee will be impacted:

  • The salary would remain at 80%, at least in terms of the CJRS reclaim, and the employee would revert to pension contributions from their net pay
  • The salary would remain at 80% (re the reclaim under the CJRS) and the employee would not be receiving the CCVs

There is a real consideration that employers may be paying a ‘regular wage’ to their furloughed employee that they have calculated and not being able to make the same reclaim under the CJRS.  This is all because the reclaim must equal the amount that the furloughed employee is being paid as cash – not the wage less any salary sacrifice.

In general, it is important for employers to realise that the workings of the scheme may mean that what is paid is not always the same as what can be recovered.

This is all more than disappointing to have had this realisation at a time when employers have contractually-agreed to change salaries.


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