Some of the transitional protections for salary sacrifice and flexible benefit packages agreed before 6 April 2017 have now come to an end. It has led the Association of Taxation Technicians (ATT) to advise employers to consider if they need to recalculate the value of affected benefits for tax purposes – and employees to be aware that they could face larger tax bills in 2018-19.
Transitional protections from tax which had applied to benefits provided to employees under optional remuneration arrangements (OpRA)1 such as salary sacrifice or flexible benefit packages made prior to 6 April 2017 came to an end last week with the start of the new tax year.
The OpRA rules were introduced on 6 April 2017 to reduce the tax savings that an employee might otherwise enjoy by exchanging potential or actual salary for a more tax-efficient benefit. Where the OpRA rules apply,2 they ensure that the value of the benefit subject to tax for the employee is the higher of the earnings given up or the cash equivalent of the benefit.3
Arrangements entered into before 6 April 2017 were given transitional protection so that the new rules would not apply until the earlier of 6 April 2018 or the date of variation, modification or renewal of the agreement. It is the benefits under those arrangements which may now be less tax-efficient.
Yvette Nunn, Co-chair of ATT’s Technical Steering Group, said:
“Employers who continue to provide flexible benefits or salary sacrifice arrangements where the arrangements were made prior to 6 April 2017 should review these to ensure that the value of any taxable benefit is calculated on the right figure. Care needs to be taken as the OpRA rules do not apply to all benefits, and some benefits get a longer period of transitional protection.4
“The new rules can operate particularly harshly in some circumstances. Before April 2017, an employee who had chosen to give up salary in exchange for a mobile phone would not normally have paid any tax on the benefit of the mobile provided. This is because the provision by an employer of a single mobile phone to an employee is generally a non-taxable benefit. But now, where a mobile is provided as part of an OpRA, the employee cannot benefit from the exemption. Any such arrangement to provide a mobile phone made prior to 6 April 2017 will have been given one year’s grace under the transitional provisions but will now be subject to tax from 2018-19 onwards.
“Employers need to ensure that they use the correct taxable figure when they report the benefits in kind which they have provided to employees at the end of the 2018-19 tax year. Any employer who includes taxable benefits on their payroll5 will need to do this very quickly, to ensure that they process the correct figure in their first salary payments for 2018-19.”
Notes for editors
1. An optional remuneration arrangement is one where an employee gives up actual or potential earnings in order to receive a benefit. There are two types of arrangement possible depending on whether:
- the employee has given up a right to earnings (or future earnings) in exchange for a benefit. This is often referred to as salary sacrifice.
- the employee has agreed to be provided with a benefit rather than earnings. This is often referred to as a flexible benefit package.
2. Certain benefits provided under optional remuneration arrangements are excluded from the new rules, these include:
- Pension contributions and pensions
- Cycles and cycle safety equipment
- Qualifying low emission cars (i.e. cars with CO2 emissions of under 75g/km)
3. To determine the value of a benefit for tax purposes, it is necessary to calculate its cash equivalent. For some benefits (such as gym membership or health insurance) this can simply be the cost to the employer of providing the benefit. For other benefits, such as cars or living accommodation, the rules are more complex, with specific formula used to determine a value for the benefit. For a car, the cash equivalent value depends on its list price, the cost of any accessories fitted to the car and the amount of CO2 it produces per km. Also taken into account are the value of any capital contributions made to the cost of the car (up to a limit of £5,000) by the employee and any amount the employee ‘makes good’ to the employer for use of the car.
4. Specific benefits with a longer transitional protection period include:
- Cars with CO2 emissions exceeding 75g/km
- Living accommodation
- School fees
Provided that the benefit arrangement is not modified, renewed or varied, then the protection for these benefits (which means that the value of the cash equivalent for the benefit does not need to be replaced by the value of the earnings foregone if this is higher) can continue until 6 April 2021.
5. Since April 2016, employers have been able to opt to ‘payroll’ benefits provided. This means that a proportion of the taxable value of the benefits provided is added onto the employee’s pay each pay-run so that the tax due by the employee is collected under PAYE over the year. Otherwise, the tax due on benefits has to be collected by amending the employee’s PAYE coding notice and this can often mean a delay between the employee receiving the benefit and paying over the tax due on the benefit.