Optional remuneration, salary sacrifice and the tax implications

Over recent years the Government has become concerned at the proliferation of salary sacrifice schemes.

This is because

  • employers could choose whether or not to offer such benefits, so they were not available to all taxpayers
  • the tax savings were greater for higher and additional rate tax payers, which seemed to give them an unfair advantage and penalise lower earners
  • the schemes could not be taken up by low paid earners if it took the earner below the minimum wage limits
  • lower paid earners could find that they are taken below the lower earning limit (LEL), the amount below which the earner is not eligible for statutory benefits.

The government was also no doubt concerned about the amount of revenue lost to the public sector coffers by such schemes.

Next stage

Once the Government had consulted it enacted the changes in The Finance Act 2017. The legislation, though complex had two main changes.

  • Benefits provided through optional remuneration arrangements would be subject to income tax and Class 1A employer’s national insurance contributions (NICs)
  • The benefit would be valued at the higher of the salary foregone or the cash equivalent, if there was one, as set out in the benefits code

HMRC then published guidance that introduced the term ‘optional remuneration arrangement’ (OpRA) and outlined the two types of optional remuneration.

  • Type A is identified as where the employee gives up the right (or future right) to an amount of taxable salary in return for a benefit. This is the salary sacrifice arrangement.
  • Type B is identified as the employee agreeing to receive a benefit rather than an amount of earnings. Where there is a cash allowance option for a benefit then the benefit would be a Type B arrangement.

If however, the employee chose to take the cash option then the tax and NICs would be calculated on the cash amount, regardless of whether the cash amount was greater or smaller than the value of the benefit.

All this is very interesting, if not confusing, but what does it mean for the busy agent or bookkeeper? What do they need to know and do?

Quite simply

OpRA rules apply to all benefits unless they are an excluded exemption benefit or a special case exemption benefit. These types of benefits will continue to be free of tax and NICs.

Excluded exemption benefits are:

  • Pensions contributions and advice provided by the employer
  • Employer supported childcare (vouchers) and workplace nurseries
  • Cycle to work scheme
  • Ultra-low emission vehicles (ULEVs)

Special case exemption benefits cover trivial benefits, subsidised meals, paid or reimbursed expenses and recommended medical treatment.

Anything other than the above is more than likely to be subject to tax and employer’s Class 1A NICs.

Transitional provisions

For pre-exiting arrangements, the Government has allowed the tax and NICs advantages to remain as below:

  • cars, vans, accommodation and school fees retain their tax and NICs free status until April 2021
  • tax and NICs free status changes if the contract ends, is renewed or modified. If however, the contract is ended for reasons beyond the control of the parties involved, then the tax and NICs advantages remain.

Employers can still provide benefits through salary sacrifice and other similar arrangements. The only difference is that the benefits, for the most part, lose their tax and NICs advantages and would have to be reported so that the tax and Class 1A NICs due could be accounted for.

Reporting benefits

Though many employers still report the benefits given on a P11D and P11D(b), there is an increasing number who are reporting via payrolling. From April 2018 benefits affected by the OpRA changes can be processed through the payroll and therefore reported in real time without having to also report on a P11D and P11D(b) (as in the previous tax year). This is in many ways more convenient for employer and employee alike as it not only means that the employer avoids the paperwork and back tracking associated with reporting benefits retrospectively, but also avoids the employee receiving a tax demand for benefits received in a previous tax year.

NIC savings

Though much of the tax and NICs benefits have gone, there is still a NICs saving for the employee.

It also avoids tax code changes for, or tax demands to, employees for benefits received in previous tax year.

For the employer, though there may no longer be any real NICs advantage to offering benefits, they do add to the overall value and competitiveness of the remuneration package; an advantage in the competitive world of recruiting and retaining talented staff.

Julie Hodgskin is a fellow member of AAT, runs a licensed accounting practice and is a technical materials author for CIPP.

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