When an employee takes parental leave, the pension contributions due depend on the tax arrangement of the pension scheme, and whether the employee is on paid, or unpaid parental leave.
If in doubt, you should refer to your employment contracts, and your pension provider's scheme details.
First, check the employee's pension scheme to see which type of tax arrangement pension scheme you have set up. To do this;
From the employee's record, click the Employment tab.
Under the Pension contributions section, click Edit.
Identify which scheme is toggled on. The tax arrangement appears next to the name of the scheme.
You can also check the employee's pre-maternity earnings under the contribution rates. This appears in the Pay on which employer contributions should be based field.
Click Cancel.
Now refer to the relevant section below to understand how pension contributions should be calculated when an employee is on paid or unpaid parental leave.
Net pay arrangement
Unlike salary sacrifice, net pay arrangement and relief at source contributions can be deducted from statutory payments. This means employees can continue to contribute towards their pension, even while receiving statutory parental pay.
| Paid parental leave | Unpaid parental leave |
Employee | Contribution is based on current earnings. | No contribution is necessary. |
Employer | Contribution is based on pre-parental pay earnings. | Check the employment contract or pension scheme details. |
Relief at source
Unlike salary sacrifice, net pay arrangement and relief at source contributions can be deducted from statutory payments. This means employees can continue to contribute towards their pension, even while receiving statutory parental pay.
| Paid parental leave | Unpaid parental leave |
Employee | Contribution is based on current earnings. | No contribution is necessary. |
Employer | Contribution is based on pre-parental pay earnings. | Check the employment contract or pension scheme details. |
Salary sacrifice
As a salary sacrifice scheme is a contractual benefit, the benefit must continue, even while the employee is receiving reduced pay, or is on unpaid parental leave. This means the employer must cover any shortfall, to ensure the total contribution is based on the employee's pre-parental leave pay.
Salary sacrifice deductions, including pension contributions, cannot be taken from statutory payments.
| Paid parental leave | Unpaid parental leave |
Employee | Based on current earnings but cannot be deducted from statutory payments. | No contribution is necessary. |
Employer | Employer must cover the shortfall to ensure the total contribution matches the pre-parental leave contributions. | Employer must cover the shortfall to ensure the total contribution matches the pre-parental leave contributions. |
For further information about the different pension scheme tax arrangements, please refer to this Help Centre article.