Furlough scheme reduces pension contributions by 25% - Now Pensions

Furloughed workers have seen their pension contributions fall by 25 per cent, five per cent more than the 20 per cent wage cut, according to analysis by Now Pensions.

The firm stressed that as furlough pay is 80 per cent of full pay, it is assumed that pension contributions would also be 80 per cent of previous total contributions.

However, a “quirk” in the system means that, as the first £120 of weekly pay doesn’t count for pensions, the effect of furlough hits harder on the portion of pay that is pensionable.

For a worker who earned £400 per week before furlough, this would see their employers pension contribution fall by over a quarter, from £8.40 to £6.

The firm found that the impact of the furlough scheme has also seen a further quarter of a million people forced into the net pay anomaly band, with those impacted by the anomaly losing out on up to £64 take home pay every year.

The anomaly, which Now Pensions has previously estimated costs low earners as much as £111m every year, impacts those who earn below the income tax threshold of £12,500, but above the auto-enrolment threshold, and whose contributions are calculated using a net pay arrangement.

The firm emphasised that whilst this was an issue that only government can resolve, Now Pensions, which is itself a net pay scheme, offers its members this as a ‘top up’.

Government statistics also confirmed earlier this year, that around three quarters of those caught out by the net pay anomaly are women.

Commenting on the findings, Now Pensions director of policy, Adrian Boulding, added: “It’s becoming extremely visible that women are being hit harder this pandemic when it comes to their finances and will continue to be disproportionately impacted as the economic crisis unravels.

“It seems to be an accident of the system, but by excluding the first £120 per week from pension contributions, the furlough scheme has caused a big reduction in contributions going into worker's pension plans.

“The way the maths works, this reduction is largest for those on low pay or part time work, and as these are often women it is widening the gender pension gap.

“The net pay anomaly is a quirk of the tax system which the Conservative Party included a review into in their 2019 general election manifesto.

“We are urgently calling for the government to not ignore this tax kink which is hurting our lowest earners and becoming a growing problem as more people’s livelihoods and jobs are hit by the pandemic.”

At the 2020 budget, the government announced plans for a call for evidence to be published on pensions tax relief administration, in line with its manifesto commitment to “comprehensively review” the net pay anomaly issue.

However, the timeframe for this has been bought into question amid the ongoing coronavirus pandemic.

In response to a written question on the timeframe of the call for evidence, Economic Secretary John Glen stated: “In the light of Covid-19, the Government is considering the publication of this and other government documents on a case by case basis, taking into account the impact of Covid-19 on stakeholders, and will provide more information on the timeframe for publication of this call for evidence in due course.

“The government has sought to support low earners through a range of measures, including increasing the personal allowance to £12,500 and committing to a new ambitious target for the National Living Wage.”

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