During the first week of the Government's Coronavirus Job Retention Scheme ("JRS") going live, we have written about the implications of furlough on employers' defined contribution pension arrangements, and separately, some issues regarding DB schemes. In this blog we provide an insight on the implications of furlough on salary sacrifice arrangements.

Employers may look to vary the terms of salary sacrifice arrangements, with the agreement of their employees, as a result of the financial implications of furlough. This week HMRC has updated its guidelines to include COVID-19 as a potential life event, clarifying that such variations are possible.

Interaction between furlough and salary sacrifice

In a pensions context, salary sacrifice involves a person giving up a proportion of their earnings in return for correspondingly higher employer pension contributions. Salary sacrifice arrangements will impact the way that the JRS operates for furloughed employees. If employers need the JRS to operate in a cost neutral way, they will need to seek to bring an existing salary sacrifice arrangement to an end.

Calculation of the furlough grant

Furlough grants must be calculated based on a reference salary which is the lesser of: 80% of the employee's monthly salary net of any deductions, or £2,500 per month. The grant covers only the statutory minimum employer auto enrolment pension contributions. The cost of contributions above this must be met by the employer (unless this is successfully varied during the furlough period).

The reference salary for calculating the furlough grant must be the amount after salary sacrifice payments have been made. The grant must not be used towards the cost of any salary sacrifice. Employers that are bound by the terms of such an agreement may consider that it is not viable for them to cover this additional cost.

How to change these arrangements?

Salary sacrifices can only be changed as a result of certain defined life events. In recognition of the COVID-19 situation and the JRS, HMRC has updated its life event criteria to include "changes to circumstances directly arising as a result of COVID-19".

If an employee agrees to be furloughed, the existing contractual arrangements in relation to their employment will need to be varied.

Even if a contractual agreement in relation to an employees' salary sacrifice is varied, employers with occupational schemes may find that there are additional provisions contained within their scheme's governing provisions that make them liable for a specified level of contributions. Therefore, it is important to ascertain the extent of any such obligations, and to consider whether any further action is required.

If an employer is in any doubt as regards the steps that it needs to take, specific legal advice is recommended.

Effect of ending a salary sacrifice arrangement

Ending the salary sacrifice arrangement during furlough is unlikely to increase the take home pay of a furloughed employee because the grant is calculated on salary for the last pay period before 19 March 2020. The grant cannot be calculated based on the pre sacrifice salary, if it was in operation at that time.

Nonetheless, it may be cost saving for employers to seek to bring salary sacrifice arrangements to an end, albeit this will depend on whether (and the extent to which) an employer is "topping up" wages above the JRS minimum level.


Juliet Bayne


Jennifer Crawford

Senior Associate

Poppy Prior