Update on optional remuneration arrangements – what you need to know

The term ‘optional remuneration arrangements’ includes salary sacrifice, flexible benefit schemes and other arrangements where the employee has a choice between cash or a benefit.

The government proposes to limit the amount of income tax and national insurance contributions (NICs) advantages that are available on optional remuneration arrangement schemes as certain inequalities have been identified. The inequalities are:

  • Employers can choose which benefits are available, and to whom they are available.
  • The savings for a higher tax rate taxpayer are greater than that for a basic rate taxpayer.
  • Signing up for the scheme may take a low paid employee below the NIC primary threshold, thus impacting on their eligibility for statutory benefits.

The government aims to reduce the unfairness of this while maintaining other wider objectives.

Salary sacrifice

Salary sacrifice schemes have been growing in popularity. The inequality of some schemes, and the consequent reduction in tax receipts has become a cause for concern for government. As a result a consultation requesting opinions as to the impact of restricting optional remuneration arrangements was launched. The findings were analysed and the proposed amendments are included in Finance Bill 2017. The new rules would apply to whichever came first:

  • an end, change, modification or renewal of a contract
  • 6 April 2018

The exception to these deadlines is for cars, accommodation and school fees. If a contract continues the tax and NIC advantages are maintained until 6 April 2021.

Proposed changes

The government has many objectives in place. One way to meet those objectives is to influence the individual by the use of tax incentives and tax restrictions. In the changes outlined here the government is amending the tax regime in support of the individual saving for retirement; family friendly employment and to minimise the effect that the population has on the environment. To that end the proposed changes are that

  • benefits provided through an optional remuneration arrangement will be subject to income tax and Class 1A employer NICs, or Class 1 employer and employee NICs.
  • the value charged will be the higher of the cash foregone and the current taxable value.

To support a more wealthy retirement, family friendly employment and a cleaner environment the government has made the following exempt from income tax and NIC charges:

  • Employer provided pension contributions and pension advice
  • Workplace nurseries and employer supported childcare
  • Cycle to work scheme
  • Ultra-low emissions vehicles (ULEVs are those vehicles with emissions of 75g CO2/km or less)

Note that the government has confirmed that there is no change to car allowances if there is no option to a company car.

Employer action

Employers may still wish to provide benefits through salary sacrifice, though the income tax and NIC advantages would no longer apply.

Salary sacrifice and maternity leave

Following a recent court case, an update is required regarding salary sacrifice and maternity leave.

The Peninsula Business Services v Donaldson case (March 2016) was about the legality of a voluntary opt-out term written into the employment contract that meant that during maternity leave certain salary sacrifice benefits ended. Donaldson maintained that this was in contravention of her rights under the Equality Act 2010. The case finally went to the Employment Appeal Tribunal (EAT) where the EAT found that the childcare vouchers given in exchange of salary were as a result of “diverted pay”, and therefore did not fall foul of the act.

Following this judgement HMRC indicated that the guidance given would be revised. This has yet to be published, but in the October 2016 ‘Employer Bulletin’ it is stated:

  • Childcare vouchers that are not part of a salary sacrifice scheme must continue during the child-related leave
  • Childcare vouchers that are part of a salary sacrifice scheme may cease if there is a contractual exclusion.

However, before any action is taken legal advice on this matter should be sought.

Recap

The changes to optional remuneration arrangements and salary sacrifice are included in the current proposed Finance Bill. The changes are:

  • benefits provided through an optional remuneration arrangement will be subject to income tax and Class 1A employer NICs, or Class 1 employer and employee NICs.
  • the value charged will be the higher of the cash foregone and the current taxable value.

The timescale for the changes are:

  • an end, change, modification or renewal of a contract
  • 6 April 2018
  • cars, accommodation and school fees 6 April 2021.

Exclusions to the changes are:

  • Employer provided pension contributions and pension advice
  • Workplace nurseries and employer supported childcare
  • Cycle to work scheme
  • Ultra-low emissions vehicles (ULEVs are those vehicles with emissions of 75g CO2/km or less)

Employment contracts should be reviewed and amended to reflect the changes above.

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

Related articles