In April 2017, limitations to salary sacrifice agreements and a new arrangement known as ‘optional remuneration’ were introduced.
It is vital that employers are fully apprised of the various alterations and dates in play, as these may impact on internal processes and employee reward schemes. In this blog, we’ll discuss the introduction of optional remuneration arrangements and what that means for your business.
What is Salary Sacrifice?
Salary sacrifice is often included within employee reward packages. Simply put, an employee agrees to sacrifice part of their salary in exchange for a perk provided by the employer. To be eligible, the employee must earn more than the minimum wage after the sacrifice has been taken into account; in addition, they must forego the required amount of salary before it has been paid, and for the required length of time (generally at least six months).
The perks on offer vary, but some of the most common are listed below:
- Company cars
- Devices (mobile phones, iPads, etc.)
- Gym memberships
- Health insurance
What Has Changed?
Before April 2017, any benefit received due to salary sacrifice was tax free, meaning that the money the employee ‘paid’ in exchange for the perk was not subject to the usual income tax or national insurance contributions. Employers were also exempted from making the national insurance contributions that would typically be due for the relevant portion of the employee’s salary.
However, under the new rules – which introduce optional remuneration arrangements – most benefits offered by salary sacrifice agreements made after April 2017 will be subject to taxation. The taxable amount will be the higher of: a) the salary that is being sacrificed; or b) the value of the benefit in kind that is being received.
What Are Optional Remuneration Arrangements (OpRAs)?
On the surface, it seems as if optional remuneration arrangements are a mere replacement of traditional salary sacrifice schemes. However, the reality is more complicated than that. Traditional salary sacrifice schemes are not entirely obsolete, for example – some benefits can still be provided under a similar arrangement, meaning that they are not taxable under the OpRAs rules.
The most important difference, perhaps, is that the OpRAs legislation is wider, covering future arrangements as well as any in which an employee could choose between cash or a benefit (such as an allowance for a company car rather than the physical asset). It is important that all employers bear this in mind, because – even if they do not currently operate a scheme that would have been classed as ‘salary sacrifice’ before April 2017 – the changes could still affect them.
Are All Benefits Subject to New Taxation Rules?
No. As mentioned above, there are a few exceptions to the new rules. The following benefits will still be treated in the same way as before (for now):
- Childcare benefits
- Pension contributions
- Employer-funded pension advice
- ‘Cycle to work’ schemes
- Childcare benefits
- Low-emission cars (<75 g/km).
It’s also worth noting that, though the legislation has changed, for many people there will be little cause for concern. A number of the perks that are commonly associated with such schemes – like gym membership – are likely to warrant a sacrifice that is equal to the value of the benefit. Moreover, as most employers manage to secure preferential rates for things like company-wide gym memberships, the process could still be profitable for employees.
How and When Will Tax Be Collected?
In order to ease the process, HMRC introduced certain ‘grandfathering’ (or transitional) rules. These stated that, for all arrangements in place before April 2017, the same rules will apply from the date which is the earlier out of: a) the date on which the relevant salary sacrifice contract ends, is renewed, or is modified; or b) 6th April 2018, with the exception of employer-provided accommodation, school fees and higher-emission company cars (which will be taxable from April 2021).
It is therefore crucial that employers fully understand their obligations before April 2018, at which point the first set of transitional rules no longer apply.
The tax due under the OpRA legislation will be collected via the familiar P11D process, and in most cases the employer will have until July of the following tax year to submit the necessary information. However, due to the impending changes to PAYE tax collection, employers might wish to consider valuing benefits early and discussing the process with any affected employees.
Confused or concerned about the changes to salary sacrifice and introduction of optional remuneration arrangements? Book a free-of-charge initial consultation with IBISS & Co today. Our experienced team of specialist tax advisers and accountants will be happy to discuss ways in which to ensure that your business offers the most attractive – and most efficient – staff benefits for your industry.