Pension Contributions During Statutory Pay, Where People Trip Up (A Lot)

3 days ago
4 min read

Let’s talk about one of those payroll topics that quietly causes chaos…Pension contributions during statutory pay.

It doesn’t get much attention, but when it goes wrong, it really goes wrong. And usually, nobody notices until months (or years) later when someone starts asking awkward questions.

The tricky part is this, the rules aren’t sitting neatly in one place. They’re stitched together from employment law, pension legislation, auto enrolment duties, and whatever your specific pension scheme says. So you’ve got multiple rulebooks all having a say at once.

That’s why even experienced payroll teams can get caught out. So let’s break it down properly

The Big Rule Most People Miss

If someone is on paid statutory family leave, so maternity, adoption, paternity, or shared parental leave:

👉 Employer pension contributions must continue

👉 And they must be based on the employee’s “normal pay” before they went off

Not the reduced statutory pay. Not what’s showing on the payslip now. Their usual salary. This is the bit that gets missed all the time.

It’s very easy to follow the payslip logic and think, “lower pay equals lower pension”. That works in most scenarios, but not here. This is one of those exceptions where payroll has to override instinct and follow the rule instead.

The aim here is protection. The legislation is designed to make sure someone taking family leave isn’t financially disadvantaged when it comes to their pension.

Employee vs Employer Contributions, They Behave Differently

This is where things start to feel a bit odd, but it’s completely correct.

Employer contributions

Based on normal pre-leave salary
Must continue during paid statutory family leave
Essentially “business as usual” from the employer’s side

Employee contributions

Based on actual pay received
So if their pay drops, their contributions drop too

That difference often raises eyebrows. But think of it like this:

The employer is maintaining the full level of support
The employee contributes based on what they’re actually earning during that period

So you end up with a mismatch, and that’s absolutely fine. It’s meant to work that way.

What About Sick Pay?

Now this is where people assume the same rules apply. They don’t. For Statutory Sick Pay (SSP):

There is no automatic legal requirement for employer contributions to continue at normal salary levels
Everything depends on:
- The employment contract
- The pension scheme rules

In practice, what we usually see is:

Contributions based on actual sick pay received
Which means both employer and employee contributions often reduce

So while family leave is about protection, sick leave is much more about “what have you agreed and what does your scheme say?” This is why blanket approaches don’t work. You have to treat each scenario on its own rules.

When Pay Drops Too Low

Here’s a scenario that catches people off guard. Let’s say someone’s pay drops so low during maternity leave that you can’t deduct employee pension contributions at all - What happens then?

Employer contributions still have to continue, based on normal salary - even if the employee contributes nothing.

It feels a bit like the employer is carrying the full weight for a while, and in a way, they are. But again, this is intentional. The rules are designed to protect pensions during family leave, even if take-home pay is minimal.

Unpaid Leave, The Tap Turns Off

Once someone moves into unpaid leave, for example the later stages of maternity leave:

Employer contributions usually stop
Employee contributions stop as well

Why? Because there’s no pay to base anything on. At that point, unless your scheme or contract says otherwise, the pension contributions effectively pause. This is a good moment for communication, by the way. Employees often assume everything just keeps ticking along, so a quick heads-up can avoid confusion later

Salary Sacrifice, The Curveball

Now let’s throw salary sacrifice into the mix, because it always likes to make things more interesting.

If an employee is in a salary sacrifice arrangement:

Pension contributions are treated as an employer contribution
And they’re based on a notional salary (what they would have earned before sacrifice)

During paid statutory family leaven the employer must continue contributions based on that notional salary However, if pay drops too low:

The salary sacrifice arrangement is usually paused
Because you can’t sacrifice pay that isn’t there

This is where payroll systems can struggle a bit, and where manual adjustments sometimes creep in.

Where Payroll Teams Get Caught Out

If I had a pound for every time I’ve seen these, I’d be writing this from a beach somewhere:

Using statutory pay instead of normal salary for employer contributions
Treating maternity and sickness as if they follow the same rules
Stopping employer contributions when employee contributions can’t be taken
Ignoring pension scheme rules and relying purely on legislation
Assuming payroll software will “just handle it” without checking

Payroll software is helpful, but it’s not psychic. It still needs the right inputs and oversight.

The Simple Takeaway

Paid family leave → Employer contributions continue, based on normal salary
Employee contributions → Based on actual earnings
Sick leave → Check contracts and scheme rules, no blanket rule
Very low pay → Employer contributions may continue even if employee pays nothing
Unpaid leave → Contributions usually stop

If you keep those five points straight, you’re already ahead of most.

Final Thought

This is one of those areas where payroll stops being “just processing” and becomes decision-making. You’re interpreting rules, applying judgement, and making sure people are treated fairly, especially at times when they’re already dealing with big life events.

If you get it wrong, it’s not just a calculation issue, it can impact someone’s long-term pension savings. So it’s always worth slowing down, checking the logic, and making sure everything stacks up. If something doesn’t feel right, it probably isn’t.

If you want a second pair of eyes on it, give us a shout. This is exactly the kind of thing we love untangling.

Need a hand? Reach out to austin@yourpayrollmanager.co.uk for a coffee over zoom