COVID-19 Job Retention Scheme – salary exchange arrangements

21 April 2020

The Government-sponsored Job Retention Scheme (JRS) allows all UK employers to claim a grant of up to 80% of an employee’s gross wage (subject to a monthly maximum of £2,500) where they are put on temporary furlough (non-working) leave for a period of up to three months after 1 March 2020. While HMRC continues to develop the electronic portal which will allow employers to apply for the JRS grant (due late April) some additional details have been released around salary exchange arrangements which can be found in the attached links:

Read the most up to date BDO FAQs on the Coronavirus JRS

What are latest details?

The table below sets out the key points arising from the new details and considerations that your business may need to consider.




Salary exchange arrangements– What wage figure should I use for JRS?

Employers must use an employee’s pay rate AFTER the salary exchange has been applied to calculate any JRS grant entitlements for furloughed employees.

Employers should not merely use the employee’s pre exchanged pay as may be shown on their payslip.

For example, a monthly paid employee with £2,000 pre exchanged pay and £100 pension salary exchange every month would be entitled to actual pay of £1,900 for these purposes. The amount to use for the JRS should be £1,900 so the employee could potentially receive 80% of this, i.e. £1,520.

  • The tax value/costs of any benefits in kind which an employee receives under a salary exchange arrangement should be ignored when calculating the entitlement to 80% of wages under the JRS.
  • This may mean that employees may be temporarily financially worse-off under a salary exchange arrangement. For example, 80% of gross pay AFTER the salary exchange is applied could be lower than a comparable employee who does not participate in a salary exchange arrangement.  However, all benefits selected must continue to be provided during furlough at the employer’s cost and cannot be netted off against any element of the JRS grant. In some cases, it may still be possible to operate the salary exchange arrangement in whole/in part from any additional “top-up” in pay that an employer agrees to pay an employee over and above the JRS grant. This will depend on individual circumstances and the wording in the salary exchange arrangements.
  • The loss in the JRS entitlement could be greater than any gain in tax and NIC from the salary exchange arrangement, depending on the terms of the arrangement.
  • There remains a degree of ambiguity at this time around whether the change in an employee’s T&Cs (to furlough terms) renders the salary exchange arrangement invalid during the furloughed period. Careful consideration should be given to the wording in furlough agreements.  

Lifestyle events

HMRC will accept COVID-19 as a lifestyle event which allows an employee to opt out of salary exchange.


  • Consider whether the salary exchange arrangements allows for a lifestyle event, and whether variations for salary exchange arrangements need to be agreed with employees.
  • Note that the JRS claim calculation needs to ‘look back’ and therefore any changes to options under a salary exchange arrangements which increase take-home pay may not be eligible for the JRS claim calculation, depending on timing.


Employers can additionally claim 3% employer pension contributions (the minimum required under pension auto-enrolment rules) as well as employer NIC costs on the JRS payment.

Salary sacrifice for pensions cannot reduce the CJRS payment due to an employee.

  • Employers will still be required to fund any additional employer pension contributions (above the 3% grant) under salary exchange arrangements. For the above example, it is likely that the 3% claim would be based on the £1,520 figure. This could result in potential additional costs for employers.
  • Employers will still have to meet all class 1A NIC costs on non-cash benefits in the same way as now.
  • Read more on how to handle salary sacrifice for pension arrangements for furloughed employees here.

Optional remuneration arrangements (OPRA)

Transitionary tax treatment afforded to specific benefits under OPRA rules (until 5 April 2021) is not invalidated where the salary exchange/cash alternative arrangement is varied if the amendment is caused directly by COVID-19.

The transitionary OPRA tax rules means that the taxable value of the specific benefit need not be subject to the normal OPRA rules (which involves valuing the amount of salary exchange/or cash alternative). This applies to certain arrangements which were in already in place prior to 6 April 2017.

Under normal rules any variation in a salary exchange arrangement would result in the cessation of transitionary tax treatment from the date of variation.  

  • These special rules only apply to OPRA arrangements which provide:
    •  cars (with CO2 emissions of no more than 75g/km);
    • accommodation; and
    • school fees.
  • HMRC has not provided any new examples for COVID-19 related “variations”. A practical example though, could be where an employer and employee agree that as no school fees are payable (for temporary period while the school is closed and on “lock-down”), no salary exchange will be applied for that temporary period.  
  • Employers should consider the appropriate wording to be included in variation documents, employee communication/furlough material and agreements, to make reference to COVID-19, as appropriate.




Key Considerations for employers

Employers should consider reviewing any salary exchange policies or documents they have as these may limit what an employer can or cannot undertake in this scenario. However, an employer should also consider the following before making any decisions on salary exchange arrangements:

  1. The employment law implications (reference should made to an employment lawyer)
  2. The financial impact on employees from any changes;
  3. Whether the fall in pay will drop the employee below pay protection limits outlined in a salary exchange policy;
  4. Whether furlough changes required to an employee’s T&Cs should accommodate changes for salary exchange arrangements. Did the agreement to Furlough employees comment on what will happen with regards to these arrangements?
  5. Whether the salary exchange drops employee pay below the NIC lower earnings limit – which may impact on future statutory benefit entitlements;
  6. The employee communication material should be reviewed to establish whether it guarantees that an employee will be financially no worse-off under the arrangements. If it does, what do you do now?; and
  7. How you communicate any impact to employees. There will clearly be many important points to communicate at this time. Should you produce a Q&A to send to employees?

Next steps

The above details provide some clarity on the impact on salary exchange as we currently understand the position and HMRC guidance. It also confirms our current understanding of how to calculate JRS entitlements where an employer operates salary exchange, or flexible benefits package for employees. Please feel free to reach out to your local employment tax contact should you require any further information, or want to discuss how the changes will impact on your business.