Techzone

The Government has introduced several packages to help businesses through the current economic difficulties created by the coronavirus pandemic.

Of particular interest to advisers are the Coronavirus Job Retention Scheme (CJRS) which provides help for employers, and the Self-Employment Income Support Scheme (SEISS).

The Government's online portal for employer claims under CRJS opened for business on 20 April, with the first payments being made the following week. They have also announced that the scheme will be extended up to the end of October, but with reductions to the maximum amount claimable.

The self-employed can now make their claim through the live online service. The self-employed scheme has also been extended with a second, reduced grant, able to be claimed.

In this insight we look at what these two schemes mean for the pensions savings of both employees and the self-employed. This is based on our current understanding as guidance from the Government is being updated on a regular basis.

1. How much will furloughed employees receive?

Eligible employees must receive at least 80% of their regular monthly wage, capped at £2,500. Employers may, however, choose to pay employees their full wage, but will not receive any Government help for amounts over these minimums. Pay will be received through PAYE as normal i.e. after the deduction of income tax and employee National Insurance.

An employee's pensionable earnings from a job that has been furloughed for part of a tax year will include the amount that the employer actually pays them during furlough. This could mean a significant reduction for some so care will be needed when topping up pension savings later in the year. It may be worth waiting until after the CJRS scheme has ended and individuals have a clearer idea of what their likely earnings will be. The same may also apply for those who are normally caught by the tapered annual allowance.

It is a condition of the CJRS that at least 80% of salary must be paid. If an employee's normal salary is to be reduced, this may mean changes to their employment contract by agreement. This should be done in a way that is consistent with employment law.

With regards to pension savings under auto-enrolment (AE) pension schemes, employers should continue to honour the full amount agreed under the scheme rules unless permitted changes are made. Again, this means employers may have to fund any excess over the pension support received from the CJRS.

2. What about directors?

Directors are employees of their own business even though they may see themselves as self-employed, often taking income as a mix of salary and dividends. But dividends are not covered by either the CJRS or SEISS, only salary that they normally pay themselves. As directors, they can still fulfil their statutory obligations, but they mustn't perform any work that is likely to generate trading profit as this may disqualify a claim.

3. What help do employers receive from the Government under the Coronavirus Job Retention Scheme?

Employers can claim a grant in respect of each furloughed employee towards the cost of keeping them on the payroll.

Up to the end of June, the amount claimable will equal to the lower of 80% of the employees' regular wage and £2,500. In addition, up to the end of July, they can claim for the employer's National Insurance on this amount, plus the employer pension contributions (up to 3% on qualifying earnings under the auto-enrolment standard quality test).

The maximum amount that an employer can claim is then changing over the following months.

From 1 July the scheme will offer flexibility, allowing employees to return to work part-time. The employer will be responsible for paying the salary, employer National Insurance and employer pension contributions for the hours worked and will be able to claim under the furlough scheme for 80% of the earnings for the unworked hours.

For example, if an employee returns to work for three days a week instead of their normal five day working week, the employer should pay them their normal contracted amount for the time worked. They will be able to claim 80% of the wages for the two days that the employee is still furloughed. They will also be able to claim the proportion of employer National Insurance contributions and minimum auto-enrolment employer pension contributions for the furloughed time until the end of July.

From 1 August, the scheme will no longer pay the employer National Insurance contributions and the employer auto-enrolment pension contributions. These will become the employer's responsibility.

From 1 September, the maximum claimable will drop to 70% of an eligible employee's regular monthly wage, capped at £2,187.50. Employers will be responsible for a 10% top up, so the total the employee receives is still 80% of their regular monthly wage, with the combined total of the scheme and employer's payments capped at £2,500.

From 1 October, the maximum claimable will drop again, to 60% of an eligible employee's regular monthly wage, capped at £1,875. Employers will be responsible for a 20% top up, so the total the employee receives is still 80% of their regular monthly wage, with the combined total of the scheme and employer's payments capped at £2,500.

If employees are working only part of their normal hours during September and October, the 70% and 60% claimable will be based on their furloughed hours.

In order to claim in September and October, the employer must be topping the wages up to 80% of the normal monthly wage (up to the £2,500 cap). These are, of course, the minimums employers must pay. They can pay more should they choose.

For the purposes of the claim, the regular wage includes any payments the employer must make, such as past overtime and compulsory commission. It excludes discretionary bonuses and benefits in kind. It also excludes any benefits provided through salary sacrifice arrangements, such as salary given up in exchange for an employer pension contribution.

This means that the maximum claim an employer can make for an employee, up until the end of July, is £2,803.38, made up as follows:

Any employer pension amount above £59.40 must therefore be funded by the employer as per their contract of employment. This may be the case, for example, if the scheme is set-up on one of the three alternatives to the standard quality test, or the employer chooses to pay employees a full wage. Similarly, any agreement to pay an increased employer contribution under salary sacrifice must also be honoured.

The grant received by a business will be included in taxable profits for income or corporation tax. But as the payments made to employees under the scheme will be deductible, including payments into pensions and employer National Insurance, the grant should not increase the tax liability for the business.

4. What duties does an employer have with regards to auto enrolment schemes during the furloughing of employees?

No changes need to be made to schemes under the CRJS.

An employer's automatic enrolment duties must continue as normal for both furloughed staff and those who are still working, including re-enrolment and compliance duties.

However, with regard to re-enrolment, employers are allowed three months beyond the third anniversary to assess staff.

5. Can pension contributions be reduced or stopped altogether?

Employers are allowed to reduce their contributions under AE rules, but not below the statutory minimum of 3% on qualifying earnings (the standard quality test).

If the employer has more than 50 employees it must consult with employees before implementing any reduction. The minimum period for consultation under normal circumstances is 60 days, but The Pensions Regulator has stated that during these difficult times, it will not take action against employers if this period is shortened, provided certain conditions are met.

However, there are other things employers should consider before reducing contributions whether or not there is a requirement to consult. These include:

• Does the change constitute a breach the employment contract? Legal advice may be advised.
• Does it break any agreements reached with trade unions or staff representative bodies?
• Do the scheme rules allow a change?

Employees may also wish to reduce their contributions, or even stop them altogether, during these financially challenging times. The Pensions Regulator is very clear, however, that employers should not induce or persuade employees to do this.

Contributions can be stopped by opting-out of the scheme. Similarly, employees reducing contributions below AE statutory minimum will also be treated as having opted-out. The consequences of this could include losing out on:

• Valuable employer contributions
• Tax incentives offered to pension savers by the HMRC
• Future investment growth
• The chance to re-join the scheme once the CJRS has come to an end. They can ask to be re-enrolled but the employer is not obliged to do so within 12 months of them opting out.

6. Salary sacrifice issues

Some employees may also consider cancelling salary sacrifice arrangements they have entered into with employers, perhaps thinking this would increase their income during these difficult times. HMRC have said that that this is possible as the current situation is regarded as a 'life event', allowing such arrangements to be cancelled.

By doing this, and on the assumption that the employer is able to pay the higher salary, the employee would then be faced with funding the contribution required under the scheme themselves. Consequently, they would be no better off immediately.

If the employee chose not to make the contribution, they would effectively be opting-out of the scheme and lose the associated benefits mentioned in (5) above.

If salary sacrifice arrangements are left in place, employers still have to pay the sacrificed salary as an employer contribution.

If an employer is not able to pay the pension contribution under the sacrifice arrangement, or is not able to pay the full pre-sacrifice higher salary if the arrangement is cancelled, this may mean changes to the employees' employment contract by agreement. This should be done in a way that is consistent with employment law.

7. What about the self-employed?

The scheme to support the self-employed is similar to the CJRS for employees. Broadly, provided the business is eligible, the first grant individuals can claim is for 80% of their average monthly trading profits over the last three years. The average may be over a shorter period if they have not been trading for the last three years. This is paid as in a single instalment, covering three months' worth of profits, capped at £7,500 in total.

The scheme has been extended, allowing a second grant to be claimed in August 2020. This grant will be 70% of their average monthly trading profits over the last three years. Again, this will be paid in a single instalment, covering three months and capped at £6,570 in total.

The grant received will form part of an individual's taxable income and HMRC has confirmed that the payments are relevant UK earnings for pension funding purposes. Unlike employees, there will be no direct help towards any pensions saving for the self-employed, although the business will still be able to claim for wages and pension costs for employees on payroll through the CJRS.