Job Retention Scheme – does your salary sacrifice have a hidden cost?

Job Retention Scheme

Some employers discover potentially significant additional costs when operating salary sacrifice schemes in conjunction with the JRS.

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Partner, KPMG Law

KPMG in the UK


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Under Job Retention Scheme (JRS) rules, employers must ensure that furloughed employees receive at least 80 percent of their cash ‘reference salary’ (subject to a cap) after factoring in adjustments in respect of any salary sacrifice arrangements. Whilst this is well understood, what is less clear for many employers is that they cannot then net off the cost of the corresponding benefit, as they would normally, from their employees’ minimum furlough pay. This creates a significant cost to employers at a time when many are struggling financially.

What’s the issue?

Normally, when an employee enters into a salary sacrifice arrangement with their employer, they agree to a reduction in salary in return for a benefit and in so doing vary their contract of employment. For example, where an employee earns £1,000 per month and agrees with their employer to reduce that amount in return for a 10 percent employer pension contribution, the post sacrifice pay is £900 with a corresponding £100 employer pension contribution.

The JRS funds a percentage of post-sacrifice pay. In other words, employers must use the lower, ‘take home’ cash pay when making a claim. In the above example, £720 (80 percent of £900, based on the current portion of reference salary funded by the JRS) would be claimed and paid to the employee. Whether the employer continues to pay the employee a monthly salary of £900, or some lower amount, would be agreed as a term of the furlough.

Additionally, unless the employer and employee agree otherwise, the employer is still contractually obliged to make the employer pension contribution which, depending on the specific terms of the furlough agreement, will be either £100 or, say, £72 (i.e. 10 percent of £1,000 or £720).

However, the full furlough grant must be paid to the employee: the employer is not allowed to reduce pay to meet the cost of the pension contribution. Therefore, the employer has an unexpected and unrecoverable contractual cost of between £72 and £100 that it is obliged to meet.

Whilst, HMRC have gone some way to recognise this by stating that furlough is a ‘lifestyle event’ (with the possibility therefore of ‘switching off’ salary sacrifice), it has also indicated that benefits should continue to be provided under furlough. Further, an employee and employer can agree to suspend salary sacrifice during furlough, but this has a tax and NIC consequence for both.

What should employers do?

In our experience, most employers have not altered their salary sacrifice arrangements. Some may now wish to reconsider that position as contributory costs to JRS start from 1 August 2020. However, having chosen initially not to do so, employers may consider it inappropriate to change their minds part way through JRS and employees may be reluctant to agree to suspend current arrangements.

Employers need to consider several points in light of this potentially unexpected cost, including:

  • What has been agreed with the employee either in the employment contract and/or the furlough agreement – should it be revisited?
  • Can an employer invoke a lifestyle event in order to change salary sacrifice selections?
  • What would be the effect on employee relations if the employer were to change salary sacrifice rules? and
  • Has the employer fully costed salary sacrifice post-furlough?

This is a complex issue requiring not just a deep understanding of JRS and salary sacrifice, but also the employment law effects on potential changes to employee contractual arrangements. All these issues require very careful consideration.

For further information please contact:

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