Optional remuneration arrangements (OpRAs, formerly known as salary sacrifice schemes) are changing.
New rules came in from April 2017, and could result in some employees losing out.
But, first, what are OpRAs? They’re arrangements whereby the employee is provided with a benefit in return for giving up some form of salary or allowance. Why do it? Because the employee may be better off under the scheme: the non-cash benefit is often subject to different rules for tax and national insurance contributions (NICs), or it may be completely exempt.
The employer may also be due to pay less employer’s NICs. Salary sacrifice schemes have traditionally included pensions, childcare vouchers, work-related training, cycle-to-work schemes and company cars.
They work well if the benefits involved are tax-free and less well if the benefits are taxed. Here’s an example. Imagine an employee on £24,000 per year, with a child who qualifies for childcare vouchers. The most an employer can pay an employee under the exempt childcare voucher rules is £55 per week, or £243 per month, for a basic-rate employee.
Let’s say the employer will not pay for the vouchers in addition to salary, but is willing to offer the vouchers under a salary sacrifice scheme. You can see what this looks like in the table.
Salary sacrifice is often used for taxable benefits as well. The employee is taxed on the benefits as normal, but will still generally be better off . So what’s happening in 2017?
The good news is some benefits will continue to be offered PAYE- and NI-free via salary sacrifice schemes after April 2017. These include childcare, cycle-to-work schemes, ultra-low-emission cars and pensions. Where a benefit is provided as part of an OpRA, the rules for valuing the amount of the benefit treated as earnings have changed.
The employee continues to be taxed on the benefit provided. But the value of the benefit that is treated as earnings from employment is the greater of either the cash amount foregone or the value of the benefit treated as earnings under the normal benefit-valuation rules.
This is known as the ‘relevant amount’. Say an employer provides an employee with private medical insurance that costs the company £500. The employee gives up her right to salary of £600. The relevant amount is £600, being the greater of the cost of providing the benefit (£500) and the amount foregone (£600).
Subject to certain exceptions, arrangements entered into before 6 April 2017 are still covered by the normal benefit-valuation rules until either the arrangement is varied, renewed or modified, or until 6 April 2018, whichever comes sooner.
Exceptions are cars with emissions of more than 75g CO2/km, living accommodation and school fees, which are all protected until variation, renewal or 6 April 2021. As usual, it’s all change in tax. As professional advisers, we need to keep up with these shifts.
Michael Steed is co-chairman of the ATT's tax Technical Steering Group and columnist for Accounting Technician magazine.