Furlough has become one of those words that has entered our vocabulary despite nobody really knowing what it meant just a few months ago.
It’s estimated that a quarter of the UK’s workforce - roughly 9 million people - are currently on the leave of absence from work. For the past few months, employers have been able to claim back the portion of their workers’ pensionable salaries, but from August things are set to change again.
Finding it hard to keep up with the all the rule changes? You’re not alone. Here we answer some of the most commonly asked questions about furlough.
What Exactly is Furlough?
In March this year, the Government introduced a furlough programme to help any employers struggling financially as a result of Covid-19. The Coronavirus Job Retention Scheme was made available for employers rather than self-employed individuals. If a business is struggling to maintain its workforce because operations have been affected by the coronavirus, it can furlough staff and apply for a government grant which covers a portion of usual monthly wage costs - up to £2,500 a month per employee on the scheme.
Furlough can apply to employees on any type of employment contract (including zero hours), including foreign nationals on all categories of visa. So long as the employee was employed on 19 March and was on the PAYE payroll before that date, they are eligible.
What About Taxes and Pension Contributions?
The government says that employees still have to pay taxes as normal through PAYE using existing rules. This also includes pension contributions - both employer and employee - unless the worker has opted out of the company’s scheme.
Until July 31, firms can claim for the costs for the hours the employee is on furlough. This is set to change from August 1, however, when businesses will be required to start paying all employer national insurance and pension contributions.
The Pensions Regulator has concluded that employers must pay contributions (using the government grant) as normal, even if staff are furloughed.
How Are Pension Contributions Calculated?
Contributions are calculated based on the 80% wage limit - unless the employer tops up the salary to 100%. This means that anyone on an 80% salary will see a drop in their pension contributions both from their employer and their own automatic enrolment contributions.
What About Salary Sacrifice Pensions?
When it comes to a salary sacrifice pension - where you give up part of your salary and the company pays that into the pension - it cannot be included in any furlough salary. That means companies cannot claim for the extra that staff make under the arrangement, but have to continue to pay the pension under the deal made with staff. Employers are within their rights to ask for written agreements to suspend payments but cannot enforce them without consent from its employees.
Are Defined Benefit Pensions Affected?
There have not been any specific rules for defined benefit pensions, or final salary schemes. The Pensions Regulator has put out some guidance on the issue, but final salary schemes are different under each company and any contractual obligations for payments may not be covered in the scheme’s terms.
What Happens After August?
From September 1, the Government will be dropping the amount it covers to 70% of a worker’s salary, and from October 1 just 60%. Employers can then top up the rest of the furlough employee’s salary – or cap it at those amounts. The government will not be paying towards pension contributions from September 1 so employees will be responsible for paying into schemes again. For the time being, the Government will continue to pay the employer’s minimum 3% contribution while the employee tops up the 5%.
Can I Pay More Into My Pension While on Furlough?
Yes. A pension can be topped up at any point and regular contribution amounts can also be changed, even while on furlough. So long as the contributions stay within the government’s annual allowance (based on earnings of the previous year and capped at £40,000) then anybody is welcome to top up their pension pots at any time.
Should I Top Up My Pot or Pause it?
Deciding on when to change your contributions and by how much is always a personal choice. Auto-enrolment is not compulsory and you can opt out at any time, however you are usually advised not to if you can possibly avoid it. An auto-enrolment pension scheme is essentially free money from your employer (in terms of their contributions) so you would be giving that up, if only for a few months.
Before pausing contributions, perhaps look at where else you can save. If you are able to save, then putting your money into a pension could be a wise idea. At the moment, thousands of people are saving each month on commuting costs, their morning coffees and lunches. If you are able to save, the option to top up your pension is there. And as we all know, the more you save the better retirement will be.
