Pension contributions during Statutory Maternity Leave
One of the common questions in payroll and employment rights social media groups is around employer duties to employees who are on maternity or adoption leave.
There are subtle differences between what are labelled as Defined Contributions to a Money Purchase pension scheme (which include all Group Personal Pension schemes, and some employer schemes).
The different tax reliefs
There are in effect three types of tax implication on pension schemes:
- Net Pay Arrangement (NPA), sometimes referred to as a net scheme, this is deducted before tax as the tax is applied on the net of gross minus pension. This type is often misunderstood as it’s not about pension being deducted from net pay.
- Relief At Source (RAS), where there is no tax relief in payroll, any tax relief is reclaimed by the pension provider. There two types of operating the employee contributions::
- Where the amount specified is deducted with the pension scheme adding a 25% uplift to the amount paid
- Where the amount specified is reduced by 20% (reflecting the basic rate of tax) and then the pension scheme adding a 25% uplift to the amount paid
- Salary Sacrifice pensions (which can be NPA or RAS, DC or DB). In these arrangements the employee agrees to a contractual pay cut on the agreement of receiving an enhanced higher employer pension contribution. The resulting employee contribution is zero.
What are the maternity right re pensions
Rights during Ordinary Maternity Leave (OML 26 weeks)
Whether in receipt of maternity pay or not, the employee has full employer pension rights as if the employee was working normally. whether contribution or service based.
Employee contributions (not salary sacrifice based contributions) are based on actual earnings
Rights during Additional Maternity Leave (AML added 26 weeks above OML)
If your employer contributes to an defined contribution occupational pension scheme, they must continue their usual contributions:
- for any time the employee receives any Statutory Maternity Pay (SMP)
- And for for any time they are receiving contractual maternity pay (CMP or OMP)
Any employee contributions (not salary sacrifice) to the pension continues based on the amount of maternity pay received.
Where a member of a defined benefit pension scheme, then they must at least have length of service credit for any paid maternity leave period. That may or may not require employer contributions.
What about Salary Sacrifice Pensions
Where an employee is only in receipt of Statutory Maternity Pay (SMP), then the salary reduction stops as there is no employer payment of salary, only a statutory payment which is from the government, even though it may be paid by via the employer or even part funded by them.
In salary sacrifice pension arrangement, all pension contributions are employer contributions. The resulting enhanced employer contributions (DC) or service rights (DB), continue during paid maternity leave based on the full normal pay prior to maternity leave.
Can an employer remove someone on maternity from the pension scheme or stop enhanced contributions due under salary sacrifice?
Simply the answer is no as that would be maternity discrimination. The employer must continue contributing or giving service entitlement for OML and any paid AML.
Can an employee request to leave the pension scheme during maternity?
Potentially although why would they – it would detrimental.
For those part of salary sacrifice arrangements, there is no continuing cost, the salary sacrifice reduction is already part of the Average Weekly Earnings (AWE) for the SMP higher rate.
For those contributing actual employee contribution, the employee could request ceasing scheme membership on a purely voluntary basis, however, it is not advisable and will act as a detriment to them in there future retirement planning,
Opinion
Maternity rights and obligations with regards to pensions are often not understood by a sizeable group of employers.
This extends to continued confusion on the legalities and impact of salary sacrifice arrangements which are popular for pension contributions changing from employee to enhanced employer contributions.
Where many employers fully comply with the legal requirements, there is also a sizeable group who do not and have limited understanding that they are breaching maternity rights.
With the different treatments of tax relief, a proportion of employers are also found to be operating the wrong tax relief arrangements.
PAYadvice.UK 20/5/2024