Furlough : benefits and salary sacrifice #COVID19 #coronavirus

Letter box, HM Treasury, by P Simon Parsons

With employees being placed into furlough, there is much confusion and misunderstanding in relation to salary sacrifice arrangements.

Benefits in kind

The provision of benefits provided by employers have different tax and National Insurance implications than an employee receiving cash remuneration.

For example:

  • Child care vouchers given to employees are tax and NI free up to certain limits determined by the annual Basic Earnings Assessment (BEA)
  • Employer provided cycles do not create a tax or NI charge on the employee.
  • Employer pension contributions (within certain limits) have no liability to tax nor NICs
  • Medical and Dental benefits are subject to P11D, although they can be payrolled for the tax liability, they are not subject to Class 1 NIC, but an employer Class 1A
  • Company cars have no employee Class 1 liability but have benefit tax and employer Class 1A
  • Etc

So if an employee buys these benefit items they have similar tax and NICs reliefs? Simply the answer is NO they don’t. Employees cannot buy any of them from their declared earnings and receive any tax and NI reliefs. Purchase would be after the deduction of tax and NICs.

Employee deduction with tax/NI relief

The Only employee deductions that have tax relief are actual employee pension contributions, charitable giving, and additionally with regards to NI relief, Share Incentive Plans.

Salary Sacrifice

So what about Salary Sacrifice, aren’t the employees buying benefits? Simply no, they are buying nothing.

Salary Sacrifice is about a contractual construction which determines benefits which legally cost the employee zero, in exchange for a pay reduction (a pay cut). Salary Sacrifice is not a pay deduction, it is agreement of a remuneration pay cut or exchange to receive a free benefit instead of cash pay. The contractual construction is key. The payroll representation is not key, the contract is.

These constructions are generally referred to as Salary Sacrifice, Flexible Benefits or Smart schemes – They involve employment law and may interact with tax, social insurance and pension law implications.

Employers and employees often do not understand them or the legal and tax implications. They can impact state benefit, maternity and pension amounts.

Often payroll operates a notional pay value. This is not earnings or pay else it would be subject to tax and NICs. Some employers then operate reductions relating to the employer provided benefits. The employee is not buying these benefits as they never earned the money. The residual amount is the actual declared earnings, 100%. And benefits selected are 100% the employers responsibility and now a contractual right. These benefits may be due to continue during periods of zero pay and certainly during maternity leave with employment law (non-cash benefits – full duration of maternity leave) and social security law (cash benefit employer pension contribution during any paid maternity leave).

So in relation to furlough during the COVID-19 pandemic and the Coronavirus Job Retention Scheme, the Scheme covers cash pay, the employer remains responsible for the provision of benefits under the contract of employment.

Furlough and Salary Sacrifice

The HMRC guidance confirms the following for CJRS:


Benefits in Kind and Salary Sacrifice Schemes

The reference salary [that is the cash pay] should not include the cost of non-monetary benefits provided to employees, including taxable Benefits in Kind. Similarly, benefits provided through salary sacrifice schemes (including pension contributions) that reduce an employee’s taxable pay should also not be included in the reference salary.

All the grant received to cover an employee’s subsidised furlough pay must be paid to them in the form of money. No part of the grant should be netted off to pay for the provision of benefits or a salary sacrifice scheme. [In other words, you cannot apply another sacrifice to a base of pay that has already been sacrificed – the employer may be contractually obliged to continue benefits at the employers cost]

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.

Normally, an employee cannot switch freely out of a salary sacrifice scheme unless there is a life event. HMRC agrees that COVID-19 counts as a life event that could warrant changes to salary sacrifice arrangements, if the relevant employment contract is updated accordingly.

Life event – required or not!

Please note that switching is always possible by agreement for Pensions, Employer Provided Childcare such as Vouchers subject to limits, Cycle to work schemes and Car Parking are not subject to requirement of Lifestyle change under the Heaton v Bell principle.

However, others are subject to Heaton v Bell and lifestyle change or contract longevity (minimum 12 months) such as: Company Cars, Medical and Dental, Life Assurance, PHI, School Fees etc etc.

Furlough and contractual change

Can an employer vary the benefits and salary sacrifice contractual arrangements as part of furlough agreements? Possibly subject to Employment Law requirements and Pension Law. Please note, employment law may allow a change yet Pension Law prevent that change. Employers will need to comply with all the overarching legal requirements.

Changing the past

Dr Who – Tardis

So can an employer cancel a Salary Sacrifice arrangement and increase the Furlough reference pay. Simply NO. Salary Sacrifice arrangements are never retrospective. 19th March has already passed and the cash income declared. So the reference pay for furlough should not be changed.

Example of furlough and salary sacrifice

An employee has a monthly notional pay of £2,800. They have a 5% salary sacrifice pension scheme applied to that notional pay, £100 childcare vouchers and £25 cycle to work salary sacrifice arrangements.


Notional Pay £2,800

Smart pension -£140 (5% of £2,800)

Childcare -£100 fixed

Cycle2Work -£25 fixed

Cash Pay £2,535 which is subject to tax and NICS (this is the reference pay for furlough.

The CJRC reclaim is 80% = £2,028 plus Ers NIC and Pension banded 3%

Unless the contract is changed, the employee remains entitled to both the £100 childcare and £25 cycle benefit funded by the employer. And the equivalent of 5% smart pension contribution.

To calculate the uplift for the employer pension contribution in relation to the sacrifice:

Furlough reference pay plus fixed salary sacrifice values divided by (100-% pension sacrifice) multiplied by 100 to determine the pensionable pay for the basis of the employer contributions.

So (£2,028 + £100 + £25) / 95 * 100 = £2,266.32 @5% = £113.32 additional employer pension contribution relating to furlough.

The same £2,266.32 would also be the basis of the non salary sacrifice employer pension contribution.

The Pension Regulator technical guidance

The Pension Regulator (TPR) published technical guidance for employers on Friday 17th April 2020

PAYadvice.UK 15/4/2020 updated 4/2020

5 thoughts on “Furlough : benefits and salary sacrifice #COVID19 #coronavirus

  1. Hi Simon, the webinar was great and this blog is really helpful! However, I have a question about the calculation at the end.

    “Furlough reference pay plus fixed salary sacrifice values divided by (100-% pension sacrifice) multiplied by 100 to determine the pensionable pay for the basis of the employer contributions.

    So (£2,028 + £100 + £25) / 95 * 100 = £2,153 @5% = £107.65 additional employer pension contribution relating to furlough”

    From my understanding, you add together the furlough payment (2028) with the fixed salary sacrifice values (100+25) first. This totals 2,153 if I’m correct. You then divide by 100 less the SS% (in this case 5%) which is 95 then multiply by 100. That would mean a calculation of 2153/0.95 which equals 2266.32 as pensionable pay. The ER pension is then 113.32.

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