Sweeping changes made to salary sacrifice rules

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Kate Upcraft outlines the changes made to salary sacrifice schemes from 6 April, and highlights government clarifications and potential grey areas around the legislation.

New name

The first challenge is to stop using the phrase “salary sacrifice”, which we have used since the tax exemption for employer-supported childcare in 2005 ushered in a new approach to benefits provision. Now we must call such arrangements OpRAs (Optional Remuneration Arrangements). But it’s so much more than a rebranding...

Two types

There are two types of OpRAs outlined in Finance Bill 2017 and the accompanying draft guidance in the Employment Income Manual released on 20 March.

  • Type A arrangements are where an employee gives up the right, or the future right, to receive an amount of earnings in return for a benefit. This is how childcare vouchers have been delivered as a salary sacrifice since 2005.
  • Type B arrangements are where employees are provided with a benefit rather than choosing to receive a cash allowance, for example choosing a company car rather than a car allowance.

It was a surprise when HMRC outlined that the type B arrangements would be caught by the new rules, as employers had not previously viewed them as a salary sacrifice.

What to do now

Employers and tax advisers need to establish which OpRAs an employer currently has, which ones are unaffected, and which ones are afforded a temporary reprieve where new contracts are in place before 6 April 2017.

Unaffected

There is no change to the treatment of benefits provided in addition to salary as they are not part of an arrangement where the employee gives up some salary. These will continue to be taxed as benefits in kind and subject to Class 1A NIC for the employer.

A few are subject to Class 1 NIC through payroll or are exempt from tax and NIC, such as workplace training or professional subscriptions. Employers can also still provide a benefit fund that employees can spend on a range of benefits which......

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About Kate Upcraft

Kate is a technical writer, editor and lecturer on all aspects of employing people - primarily payroll and HR matters.

Replies

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03rd Apr 2017 14:54

What about salary sacrifice for extra paid holidays?

Seems harsh if it does apply but I lean towards the view that it does.

If it does then what about the scenario where a person requests a change from full time to part time working? Arguably that is no different from buying extra holidays.

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to gbuckell
04th Apr 2017 09:19

The new rules don't apply to schemes where the benefit is something intangible, such as extra holidays. Such schemes simply mean that the employer agrees that the employee works fewer hours and therefore receives proportionately less pay.

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04th Apr 2017 10:13

I hope you are right. But do you have any backing for this view? In the Finance Bill benefit is defined as including "any benefit or facility, regardless of its form
and the manner of providing it" which strikes me as wide enough to embrace extra holidays. I can see nothing in the Employment Income Manual (link in main article) that addresses this issue.

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to gbuckell
04th Apr 2017 10:32

There is something of a problem in that the guidance is , shall we say, still a little sparse! The best I can find is the statement on page 6 of the consultation response, which says "There will be no change where salary is sacrificed in return for intangible benefits such as additional annual leave....". The document is at https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil....

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to gbuckell
06th Apr 2017 22:47

There is no change in value, hence it is not affected. So the employee will be taxed and pay Class 1 NICs on the payment received.

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04th Apr 2017 11:02

Thank you for the link. It is reassuring but the phrase "intangible benefits" makes me nervous as it includes the word benefit. As stated there is nothing I can see in the draft legislation that excludes this. Unless I have missed something (again!) may be the legislation will be amended or HMRC "interpret" the meaning of benefit not to include an intangible one. It is interesting that the original question refers to extra annual leave as not strictly involving the receipt of a benefit. When is a benefit not a benefit? When it is intangible!!

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to gbuckell
04th Apr 2017 11:08

It's certainly not HMRC's intention to bring these arrangements into scope. As to whether they've succeeded in this objective with the wording they've used in the regulation is something we'll have to leave the lawyers to decide!

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06th Apr 2017 15:58

Is there anything about "salary sacrifice" in exchange for travel and subsistence allowances?

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to ruth.julian
06th Apr 2017 22:45

The amount of the OpRA will be subject to P11D tax and Class 1A.

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06th Apr 2017 22:51

Marginal benefit. HMRC policy have indicated that the comparison is on the amount of OpRA cash v the marginal benefit. The indication, for example, is that were a 2x life assurance is freely given to all employees, but through OpRA arrangement an employee could increase that to x4 cover, the comparison is between the amount sacrificed and the marginal cost difference.

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By MJShone
10th Apr 2017 12:06

Thanks for flagging up the trap Kate. All other commentary I've seen talks about people in existing OpRAs as at 5 April 2017 being protected until 6 April 2018. It looks as if schemes with an annual renewal date pre 6 April 2018 will be caught. So if your OpRA date is, say, 1 May 2017, the new rules apply from 1 May 2017, not 6 April 2018. That appears to be the case even if the arrangements don't actually change eg an employee currently gives up £50 a month in gross pay in exchange for car parking. The flexible benefits scheme renewal date is 1 May 2017. The employee elects to carry on with the current arrangement which still costs him £50 a month from gross. If the employer actually pays £75 plus VAT a month, the employee, with effect from 1 May 2017, is taxed on £90 a month.

Have I got that wrong?

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