Welcome to the Salary Sacrifice and Optional Remuneration Arrangement (OpRA) resources on PAYadvice.UK.
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Introduction
Recent years have seen a dramatic increase in the popularity of salary sacrifice arrangements, with some including benefits beyond those which the Government considers to be reasonable.
Some schemes have found methods of reducing employers’ secondary National Insurance contributions (NICs) since their rise to 13.8% providing employers savings on their pay bills.
Many salary sacrifice arrangements have offered significant tax advantages, especially to highly paid workers paying tax at the higher (40%) or additional (45%) income tax rate. And more traditional employer-provided benefits have increasingly allowed cash alternative options.
Salary sacrifice arrangements have utilised as a legitimate vehicle for tax advantages and NICs savings for both employees and employers. However, since 6th April 2017, Schedule 2 of the Finance Act 2017 introduced the concept of ‘optional remuneration arrangements’ (OpRA) legislation to curtail many of the former advantages. These rules have impacted other cash choice arrangements (such as a company car scheme with car allowance options) and apply an alternate employer Class 1A NICs liability.
It is essential that employers (their Human Capital and Payroll professionals) regularly review their salary sacrifice, flexible benefits or other cash alternative arrangements, to ensure that contracts are changed as necessary and that the taxation of benefits v cash is both planned and correct under PAYE and National Insurance rules.
Salary Sacrifice
So what is a salary sacrifice?
A salary sacrifice takes place where an employee gives up the contractual right to part of his cash remuneration due under his contract of employment, usually in order to be provided with some form of alternate non-cash benefit in kind. The ‘sacrifice’ is achieved by varying the employee’s terms and conditions of employment. An employee may also sacrifice one-off future payments such as bonuses.
Example
An employee’s contract of employment may provide a cash salary of £30,000 per annum with no employer-provided benefits. The employee agrees with the employer that in future he will be paid a cash salary of £28,000 with the employer making a £2,000 employer contribution to an approved pension scheme. This would be referred to as a salary sacrifice and have the effect of saving the employee tax at the highest prevailing rate on the pension contributions and NICs savings for both the employee and the employer on the employer contribution amount.
HMRC accept that employers and employees have the right to arrange the terms and conditions of their employment; however, the range of benefits that would be tax efficient limited by OpRA law which has been applied since 6th April 2017.
When is salary sacrifice effective?
A salary sacrifice arrangement is effective when the contractual right to cash has been reduced meeting two conditions:
- the employment contract terms are changed before the employee becomes entitled to the cash remuneration; and
- the employee is only entitled to a lower cash remuneration plus a benefit.
The first condition concerns the timing. The potential future remuneration must be contractually sacrificed before it is treated as valid (there is no retrospective tax or NICs relief).
The second condition concerns the ‘true construction’ of the revised contractual arrangement between employer and employee. They will have either:
- genuinely reduced the employee’s entitlement to cash remuneration in exchange for provision of a benefit (successful salary sacrifice through contractual change); or
- continued the employee’s entitlement to the original level of cash remuneration or only diverted earnings – under this arrangement the employee is asking the employer to apply part of his cash remuneration in providing a benefit (no successful salary sacrifice, no contractual change).
If a salary sacrifice is successful and the benefit is not caught by the new OpRA rules, the employee will be taxed under ITEPA 2003 s 62 (PAYE and NICs through the payroll) on the lower cash remuneration received by the employee and, if applicable, under the ITEPA 2003 benefits legislation on the cash equivalent of the benefit received (reported as a P11D item or voluntary payrolled).
Note: if the employee is able to give up the benefit at any time, and revert back to the original cash salary, HMRC will consider the benefit to be chargeable under ITEPA 2003 s 62 following the principle established in Heaton v Bell (1968) 46 TC 211. The principle of ‘money’s worth’ has been written into the definition of earnings in ITEPA 2003 s 62(2) and (3). It is possible for an employee to receive a benefit that is exempt from income tax under ITEPA 2003 but for a charge to arise on earnings because the terms of the employment contract allow the benefit to be given up and the former, higher level of salary/wages to be reinstated.
Some benefits have limits in order to prevent avoidance:
- New joiners to employers’ childcare schemes from 6th April 2011 are required to undertake an annual ‘basic earnings assessment’ (see below) to check their predicted income. From 6th April 2018, with the introduction of the Government’s new tax-free childcare provisions, new entrants are no longer permitted.
- HMRC have in place provisions to restrict certain employees’ annual tax relief on pension savings. Any recovery of tax relief above individual entitlements is recovered through self-assessment and is not a payroll activity.
Where salary sacrifice is not successful, an employee continues to be liable to tax and NICs through payroll on the higher level of cash remuneration with no cash equivalent under the benefits or OpRA rules.
The ‘available generally’ condition
Some benefits in kind only allow tax and/or NICs relief if the ‘available generally’ condition is satisfied. Condition C of ITEPA 2003 s 270A sets out conditions for employees wishing to participate in childcare voucher schemes which qualify for tax exemption. Where such arrangements are made without being available generally to employees, the exemption from the chargeable benefit does not apply. On 24th March 2010, a measure was introduced to relax the exemption of Condition C in the case of relevant low-paid employees where the childcare voucher scheme is provided through a salary sacrifice arrangement that would result in the employee’s earnings being reduced to levels below the national minimum/living wage.
The available generally condition applies also to bicycles and/or cyclists’ safety equipment. If any group of employees is excluded from a cycle-to-work scheme, the scheme fails for all employees and there is no tax or NICs relief.
Making salary sacrifice effective.
The terms of an employment are set out in the contract between the employer and employee. The contract or agreement will usually specify among other things:
- the obligations and responsibilities of the employee (e.g. hours of attendance at the workplace, standards of work, dress code); and
- the remuneration package to be paid and provided (this may include cash wages/salary, non-cash benefits, pension rights, etc).
In a salary sacrifice arrangement the contract is changed or varied. The employee may agree to a smaller cash salary in return for a non-cash benefit. Varying the contract can be achieved by:
- rewriting the document in part or whole; and
- setting out the agreed changes in a separate document that is attached to the main contract (e.g. a letter or pro-forma).
In such cases, the employee will usually signify his agreement by signing the document or by electronic agreement.
However, an employer may also inform employees of proposed changes and specify that if an employee has not indicated by a certain date their wish not to participate in the changes, then this absence of an ‘opt out’ will be regarded as an ‘opt in’. This approach is often used when wholesale changes to employees’ terms and conditions are proposed (eg changes to the employer’s occupational pension scheme).
In this case, if the following conditions are satisfied an employee will be deemed to have indicated his agreement to the changes by his conduct, and the revised agreement will be legally binding on both parties:
- the employee was fully informed of the proposals;
- the employee was given a specified date by which time the ‘opt out’ must be made;
- the employee continues working after the opt out date; and
- the employee continues working without protest after the first pay day when the changes have been implemented.
Setting up a salary sacrifice scheme
HMRC state that they will not comment on:
- how to set up a flexible benefit salary sacrifice scheme; or
- whether draft documentation will achieve a successful salary sacrifice.
However, it is worth consulting with HMRC on the correct taxation and reporting position with regards to employer-provided benefits so that the intended payroll operation is verified as being correct and the appropriate end-of-year declarations and forms are completed, such as the P11D or voluntary payrolling. Many benefits now attract employer only Class 1A NICs and therefore must be reported/adjusted on the P11D(b) (and the appropriate payments made by the employer).
Example: salary sacrifice to a retirement benefits scheme
An employee is contractually entitled to a bonus each year based on the profits of the employing company.
The company’s year-end is 30th September with accounts finalised on 30th November. The employee is informed on 31st December 2023 of a bonus of £2,500. The communication on the bonus asks the employee to choose between:
- receiving the bonus in the March 2024 payroll; and
- giving up the employee’s contractual rights to the bonus in return for the company making a £2,500 plus £250 partial enhancement from the employer’s NICs saving, paid as an employer’s contribution to an approved retirement benefits scheme in March 2024.
The employee chooses the second option and returns the completed documentation to this effect on 31st January 2024. The completed documentation makes it clear that:
- the employee has given up his contractual rights to the bonus; and
- the employee does not have the right to change his mind on this decision.
This is a successful sacrifice because it meets the necessary requirements:
- the sacrificed bonus is exempt on pay day March 2024, as it is given up before; and
- the true construction of the revised arrangement between the employer and the employee is that the employee has lower taxable cash remuneration and a non-taxable benefit – the £2,750 is not taxable or NI-able on the employee and is treated as an employer pension contribution.
Exemption for workplace nurseries (ITEPA 2003 s 318)
A benefits charge arises when an employer provides childcare facilities for the children of its employees. There is an exemption from this charge under ITEPA 2003 s 318 when the childcare for eligible children is provided by an employer on the employer’s premises or where the employer is responsible for the management and financing of the arrangements.
The exemption only applies when:
- the narrow conditions for exemption are met; and
- the charge to tax would otherwise be under ITEPA 2003 s 203.
This exemption does not apply to childcare paid for out of the employee’s pay (ITEPA 2003 s 62), or where any money paid out by the employer in respect of the childcare represents an application of the employees pay.
Childcare vouchers – employees in scheme prior to 6th April 2011
If certain conditions are met, the first £55 per week (or £243 per month) of the childcare vouchers is exempt. The three conditions are as follows.
- Condition 1: The child must be:
- a child or stepchild of the employee; or
- resident with the employee and a person in respect of whom the employee has parental responsibility.
- Condition 2: The childcare provided must be qualifying childcare.
- Condition 3: The childcare vouchers must be available to all employees or all employees at a particular location.
The maximum exemption is £55 for each tax week (or £243 for each tax month). Only one entitlement is allowed for each instance of employment.
Childcare vouchers – employees joining scheme from 6th April 2011
From 6th April 2011, for new joiners to a childcare voucher scheme, or employer-contracted scheme changes, an employer is now required to undertake an annual basic earnings assessment to check the employee’s estimated income.
The assessment determines an employee’s estimated income as follows:
- Employees who earnings are judged to be at basic rate (20%) (where the earnings do not exceed the basic personal allowance, any blind allowance due plus the basic rate threshold) are entitled to up to £55 per week or £243 per month of benefit provision, tax and NICs free.
- Employees whose earnings are judged to reach higher rate tax (40%) are entitled to £28 per week or £124 per month.
- Employees whose earnings are judged to reach additional rate tax (45%, due to earnings exceeding £150,000) are entitled to £25 per week or £110 per month.
The actual tax rate or tax code applied within the payroll has no relevance to the basic earnings assessment.
The assessment includes the following (always judged on an annualised basis):
- basic pay, as stated in the contract of employment;
- contractual bonus;
- London weighting and regional allowance;
- shift allowance;
- qualification payments (such as first aid allowance); and
- taxable benefits in kind (those contracted at the point of undertaking the assessment).
The assessment does not include:
- performance-related pay or discretional bonuses;
- overtime payments; or
- earnings or benefits exempt from tax (such as pension, share scheme and charitable giving).
If an assessment is not carried out for an employee joining the scheme from 6th April 2011, entitlement to tax and NICs-free provision of childcare is zero.
If an employer-provided scheme chooses to exclude any group of potentially qualifying employee, the benefit is not generally available and therefore loses its tax and NICs-free status for all pre-existing qualifying employees. The scheme, in effect, comes to an end.
New entrants to an employer’s childcare voucher scheme have not been permitted since 6thApril 2018 although pre-existing members can continue. New parents may utilise the Government’s new tax-free childcare scheme instead.
Example: salary sacrifice and non-cash childcare vouchers
An employee is entitled to an annual salary of £30,000. He agrees to a salary sacrifice to move in the future to an annual remuneration package comprised of £28,000 cash and £2,000 plus £100 in childcare vouchers for qualifying childcare provision (partially enhanced by the employer’s savings in NICs) which is allocated evenly across the tax year. The basic earnings assessment undertaken by the employer confirms that the employee’s tax and NICs-free entitlement is £243 per month. The £2,100 of face value vouchers is not taxable and does not attract NICs, neither does it need to be reported on the P11D as this benefit is exempt. Tax and NICs will be due only on the £28,000 cash pay.
VAT and childcare/childcare vouchers
VAT is paid on supplies of goods or services in the UK by way of business. In the case of vouchers, generally no supply of services takes place until the vouchers are redeemed towards the cost of qualifying childcare. Childcare is exempt from VAT. Any VAT incurred by businesses on voucher administration fees met directly by the employer is subject to normal rules on the recovery of input tax.
Only where the administration fees are fully paid by the employer can VAT recovery be made. Where any VAT element is passed on to the employee, recovery is not permitted.
Salary sacrifice and the payslip
HMRC are aware that many payslips continue to show the pre-sacrifice level of pay with a sacrifice amount shown as a negative, or even as a deduction made before PAYE and NICs is applied. This format gives the impression that the employee is entitled to the former (higher) level of salary and has simply applied a sum to reimburse the employer for the provision of a benefit.
HMRC agree that where the employment contract has been effectively varied the format of the payslip will not be used to challenge the effectiveness of the arrangement. However, if the contract has not been changed, the format of the payslip is a piece of evidence that HMRC could use as a basis on which to challenge a salary sacrifice arrangement.
Class 1A implications
Employers are liable to pay Class 1A NICs for non-exempt benefits provided to employees and directors for whom a P11D is produced, or where voluntary payrolling is being applied (including where benefits in kind are provided to employees under a successful salary sacrifice scheme).
Employers are not liable to pay Class 1A on benefits which are:
- exempt from income tax;
- taxable but specifically exempt from Class 1A;
- covered by a dispensation;
- included in a PAYE Settlement Agreement;
- already assessed for Class 1 NICs; or
- provided exclusively for business use.
Class 1A NICs are worked out on an annual basis using the higher of the cash equivalent of the benefit or the cash earnings foregone (including cash allowance schemes). The same rules for calculating the cash equivalent are used for both tax and Class 1A NICs.
The amount of Class 1A NICs due is calculated by:
- adding together the taxable values subject to Class 1A reported on the P11D and adjusted by any benefits in kind that have been payrolled; and
- multiplying the total figure by the Class 1A percentage rate of 13.8% (for payments due in July 2018).
Once the amount of Class 1A NICs has been calculated, it must be declared using form P11D(b) even for those payrolled.
The process is as follows:
- complete form P11D for the appropriate employees;
- complete form P11D(b) for benefits liable to Class 1A NICs from both P11D and adjusted for those payrolled;
- send the completed form P11D (if any) and P11D(b) to the HMRC office by 6th July; and
- send payment of Class 1A NICs, appropriately indicated as Class 1A, to HMRC by 19th July (22nd July for cleared funds if payment is made electronically).
For 2024 the deadline for payment is 19th July for cheque payments. However if an employer is paying electronically then HMRC must receive cleared funds at least by 22nd July.
Optional remuneration arrangements (OpRA)
Introduced from 6th April 2017, income tax and employer NICs advantages for benefits in kind provided through ‘optional remuneration arrangements’ (OpRA), where an employee has given up the right to an amount of earnings, where largely withdrawn. The Government claimed that this change was made to redress the tax and employer NIC advantages that use of such arrangements has previously allowed.
Other than exempted items, any new or revised arrangement (those modified, varied, or renewed) on or after 6th April 2017 fall under the OpRA rules.
For the purposes of the benefits code, a benefit is provided to an employee under OpRA if it is provided under either a ‘Type A’ or ‘Type B’ arrangement as defined in ITEPA 2003 s69A.
- Type A arrangements – in return for a benefit, the employee gives up the right (or a future right) to receive earnings which would have been chargeable to tax. Salary sacrifice arrangements fall into this category.
- Type B arrangements – when an employee has an option choice of taking a benefit or an amount of earnings.
Cash alternate arrangements are captured by Type B arrangements, such as a company car scheme that allows a cash alternative, or where a benefit such as medical insurance could be given up in order for an employee to receive a cash alternative.
The impact of Type B arrangements may be a surprise to many employers. Such arrangements are often not be considered salary sacrifice arrangements, but they do fall under the new rules and may result in a higher tax liability and an employer Class 1A NICs liability.
OpRA and the amount foregone
When an employee chooses a benefit instead of some form of alternate cash payment, except for those benefits exempted, the value of the benefit treated as earnings is the greater of the amount of cash pay given up and the taxable value of the benefit less the amount made good by the employee.
Employees may be provided with benefits through partial OpRA arrangements. When determining the relevant amount, only the amount foregone is to be considered. So, whether that is a personal contribution or extending the scope of a core benefit, only the element of benefit covered by a cash choice is subject to OpRA rules. For example, where an employee receives a two times life assurance cover as a core benefit and has as option to extend through salary sacrifice to a four times cover, the extension choice falls under OpRa rules.
OpRA transition period (now all expired)
Due to the nature of some former salary sacrifice agreements (ie due to timing and length of the life of the arrangement) and to allow employers and employees to transition from the former tax and NICs position to the new liability, a transitional period, referred to as ‘grandfathering’, was applied to cushion any impact on employees.
Pre-existing arrangements (ie those in place before 6th April 2017) fell under OpRA rules from 6th April 2018, other than arrangements where the benefit provided is a car with CO2 emissions of over 75g/km, school fees or living accommodation – in these cases all of the grandfathering positions ended on 5th April 2021.
Benefits exempted from the OpRA provisions
Benefits provided through OpRA arrangements are no longer covered by prior exemptions under ITEPA 2003 Pt 4 unless the exemption is an excluded exemption under one of the following ITEPA 2003 sections:
- Section 239 – payment and benefit connected with taxable cars, vans and heavy good vehicles
- Section 244 – cycles and cyclists’ safety equipment
- Section 266(2)(c) – non-cash vouchers used for cycles and safety equipment
- Section 270A – limited exemptions for qualifying childcare vouchers
- Section 307 – retirement benefits
- Section 308 – contributions to registered pension schemes
- Section 308A – contributions to overseas pension schemes
- Section 308C – pension advice
- Section 309 – limited exemption statutory redundancy payments
- Section 310 – counselling and other outplacement services
- Section 311 – retraining courses
- Section 318 – employer-provided childcare
- Section 318A – limited exemption for other childcare provisions
None of the above were impacted by the OpRA changes even when provided as part of an OpRA arrangement such as salary sacrifice. This includes cars with CO2 emissions of 75g/km or less.
Flexible benefits packages, salary sacrifice and OpRA
With flexible benefit salary sacrifice schemes, employers allocate their employees a notional salary value in which to build their cash remuneration and benefits package.
The flexible benefits on offer from the employer have an equivalent monetary value associated with them. The total value of all the benefits from the flexible scheme taken by each employee is deducted from their notional salary to derive a cash balance that is actually paid through the payroll as their basic pay.
Because of the employee taking a reduction in basic pay and to avoid impacting other payroll items, often the notional salary is used as the value to calculate any associated standard items such as overtime, hourly rates, life assurance payment amounts, company pension contribution and pension earnings entitlements, that are provided as part of the core remuneration package so as not to overly disadvantage the employee.
The employer may also have wanted to preserve entitlements for the extra amounts because of the resulting reduction in entitlements for Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), Statutory Paternity Pay (SPP), Shared Parental Pay (ShPP), Statutory Adoption Pay (SAP) and Statutory Parental Bereavement Pay (SPBP). These additional preserved amounts would be paid as occupational top-ups of sick, maternity, paternity, shared parental and adoption pay. As these additional amounts are now employer provided occupational payment, no recovery or compensation is permitted to be claimed from the Government on these excess top-up amounts.
Where formerly there was a cash pay element of salary sacrifice (where the employee could choose cash or a benefit), such arrangements have been impacted by the OpRA rules. However, where only benefits can be chosen with no cash option, then the OpRA rules do not impact the flexible benefit arrangement. The introduction of the OpRA means that some flexible benefit schemes were required to be redesigned to a benefit pool only with separate salary.
OpRA and flex-down options
Some arrangements provide benefits to employees which may not be part of any traditional salary sacrifice arrangement. In recent years, employers have introduced options where employees may ‘flex down’ their standard entitlements and receive an alternate amount of cash pay. Where such options exist, the option to flex down may introduce tax and Class 1A NICs implications under the OpRA rules for individuals who have not taken the cash option but maintained their contractual entitlement.
Example
An employer may undertake life assurance of four times salary cover. The provision of this benefit is not subject to tax and NICs. However, if two times cover plus cash pay of £100 was available as an option, then an OpRA arrangement is in place. For individuals who have not flexed down their entitlement, the provision of the four times cover would now be subject to a benefit charge of £100 for tax and Class 1A NICs on the employer.
Employers may wish to review and potentially remove some flex-down options to protect standard benefit provision. The exception is for buying and selling holiday, where the adjusted pay is subject to tax and NICs with no OpRA implications.
VAT and salary sacrifice – The Astra Zeneca case
Astra Zeneca operated a flexible remuneration scheme where employees could opt to take part of their remuneration in the form of goods and services. A case before the Court of Justice of the European Union (CJEU) concerned the correct VAT assessment on high street shopping vouchers (see Astra Zeneca UK Ltd v Revenue and Customs Commissioners (Case C-40/09) [2010] STC 2298.
The CJEU found that the provision of vouchers amounted to a supply of services. Whilst Astra Zeneca was able to recover VAT incurred on acquiring the vouchers, VAT was equally due on the consideration received from its employees.
HMRC accepted that the reduction in salary did not constitute consideration for the benefits received and VAT (output tax) was not due. Employers were able to recover the related VAT (input tax) subject to normal rules.
The CJEU found that there was a direct link between the provision of the retail vouchers by the employer and the part of the cash remuneration which the employee gave up. HMRC now consider the impact to be wider and there is no longer a distinction between deductions from salary and salary sacrifice.
PAYE Settlement Agreements
A PAYE Settlement Agreement is an agreement between an employer and HMRC under which the employer agrees to pay the tax in a lump sum on certain expenses and benefits in kind. The employer does not have to include items covered by a PAYE Settlement Agreement on form P11D.
Class 1B NICs are payable on PAYE Settlement Agreements at the same time as the tax.
Payrolling and taxing benefits at source
The benefits of payrolling (taxing benefit items at source) are considered to be as follows:
- For the employees:
- the risk of under/overpayments is reduced – keeps the employees’ tax affairs up to date with regards to their benefits in kind;
- the tax code is simplified; and
- the employee tax return is easier to complete.
- For the employers:
- the workload associated with the production of forms P11D is streamlined;
- there are fewer tax queries from employees as there is no longer a tax code bounce effect;
- fewer tax code notices are received from the HMRC; and
- there is improved accounting information.
- For HMRC:
- workloads can be significantly reduced as a result of not needing to maintain benefits within tax codes;
- fewer assessments for over/underpayments are required; and
- there are fewer queries from employees.
The benefit items taxed through the payroll may need to be included on the P11D(b) to take account of any Class 1A NICs liability.
Salary sacrifice and real time information
To enable the Department for Work Pensions (DWP) to calculate an accurate assessment for Universal Credit, benefits in kind which have been included in taxable pay additionally need to be appropriately populated into special fields on the real time information (RTI) Full Payments Submission (FPS). Class 1A NICs, reported on the P11D(b), are still applicable on appropriate and applicable benefit items even when they have been taxed at source or voluntary payrolled.
RTI introduced the following reporting fields in relation to payrolled benefits in kind.
- Benefits taxed via payroll (RTI field 60) – the total of the allowance amounts indicated as being benefits in kind that are taxable this time.
- Benefits taxed via payroll Year to Date (RTI field 149) – the total of the allowance amounts indicated as being benefits that are taxable year to date.
Employee communication
Whenever a salary sacrifice scheme or other OpRA arrangement is implemented, a communication programme is best initiated with employees impacted by the change.
The communication should cover all aspects, including:
- what benefit the employee receives;
- reasons for making the change;
- the effect on the contract of employment;
- the effect on the payslip or pay advice;
- the effect on the annual P60;
- the effect on tax and NICs and the annual P11D or payrolling;
- how to effect changes and corrections;
- the implications with regard to employment-based statutory payments such as SSP, SMP, SPP, ShPP and SAP;
- the implications with regard to the national minimum wage and national living wage, and the contractual implication where there is insufficient earnings to operate a salary sacrifice arrangement; and
- the implications with regard to other state-paid benefit such as pensions, and the impact on unemployment benefit entitlements.
Benefits that may be offered through salary sacrifice
Benefits which are taxable under PAYE and liable to Class 1 NICs, and which are not impacted by OpRA, are as follows:
- Benefit buy-out – extra cash remuneration due to flex buy-out (such as selling holiday entitlement or other benefits in kind for enhanced pay).
- Relief at source pensions – employee contributions to an approved pension scheme which receives tax relief at source. The employee receives an extra payment to the pension scheme equivalent to refunding tax at the basic rate. No tax or NICs relief is given in the payroll.
Benefits which are taxable under P11D and liable to Class 1 NICs are as follows:
- Retail vouchers – taxed and NICs payable [at the higher of the cash foregone or the cost of providing the vouchers to the employee, not the face value of the vouchers unless this is the actual cost or amount foregone. The employer may be able to negotiate a discounted amount from the face value.
- Non-qualifying childcare vouchers – childcare vouchers which are for non-approved childcare or where the amount exceeds the weekly tax and NICs-free amount judged on whether the employee joined the scheme prior to 6 April 2011; or for those who join a scheme from 6 April 2011, based on the result of a basic earnings assessment; or for all new entrants to the employer’s scheme from 6 April 2018.
Benefits which are taxable under P11D and liable to Class 1A NICs, and which are only affected by OpRA if the cash foregone amount is different to the benefit charge amount, are as follows:
- private medical insurance;
- health plans;
- dental insurance;
- critical illness insurance;
- personal accident insurance (costs relating to death cover are exempt); and
- spouse annual medical screening (spouse of the employee).
In all the above circumstances the employee has no liability for primary Class 1 NICs and therefore is making a personal saving in NICs. Under the former method of NICs calculation, a saving of 12% was only made if the earnings were above the earnings threshold and below the upper earnings limit (UEL). However, with the additional 2% NICs contributions above the UEL, employees will make at least a 2% reduction in these circumstances.
Benefit-in-kind employer enhancement
When an employer provides benefits in kind through a successful salary sacrifice scheme that continues to be exempt under the new OpRA provisions, both the employee and the employer may make significant tax and NICs savings.
For items that now attract an employer Class 1A liability, the employer’s advantage will be lost at the end of the grandfathering period or at a change point.
In some cases, employers may enhance benefits, such as non-cash childcare vouchers and employer pension contributions, through the savings made to employer NICs.
Parental leave considerations
Employers must understand the legal position and implications with regards to the provision of non-cash benefits to an employee during paid parental leave periods.
Where an employer has entered into a salary sacrifice arrangement to provide non-cash benefits to an employee even if impacted by the OpRA provisions, the employer has no entitlement to operate the salary sacrifice against any statutory payments (SSP, SMP, SPP, ShPP and SAP). Salary sacrifice may only apply to the contractual payment made under the terms of the contract of employment.
However, the employee is entitled to continue to receive the non-cash benefit in kind during maternity, paternity and adoption leave without any actual salary sacrifice being applied, and at the expense of the employer. It could be argued in this instance that this truly becomes a free benefit in kind where VAT does become claimable by the employer as there is no salary sacrifice in force or other deduction from the employee.
Where an employer makes contributions to pension schemes (even under salary sacrifice arrangements), the employer is obliged to continue making these contributions as if the employee were being paid normally (not the reduced payment) during all periods of paid parental leave, even if they extend beyond the ordinary parental leave period.
Attachments of earnings orders, earnings arrestments, and student loan deductions
If an employee makes a successful salary sacrifice it would reduce the amount of earnings subject to attachments of earnings orders, Scottish earnings arrestments, and student loan deductions.
National minimum/living wage implications
Salary Sacrifice amounts always reduce the amount of earnings which are treated as being paid to meet the requirement of National Minimum Wage (NMW) regulations. Even if additional amounts are paid to cover elements of benefit provision, those amounts may not be counted as earnings for NMW purposes and may not be used to offset any salary sacrifice amounts applied.
It is essential that employers do not allow employees to sacrifice so much of their notional pay that it reduces their cash wage below nationally set minimums. These must be paid in wages and not kind even under salary sacrifice or OpRA arrangements.
This is especially important when the minimum wage changes (generally from 1st April each year), and employers will need to consider the timing of operating flexible benefit schemes and salary sacrifice in alignment with the timing for minimum wage changes.
Even if benefits are taxable and consequently taxed at source, these types of benefit provisions do not count towards the payment of the national minimums.
State benefit and retirement benefit implications
Because a salary sacrifice is a reduction in pay there may be implications for employees on statutory payments and state benefits.
An employee is likely to have reduced state earnings-related pension. It is also possible that the sacrificed salary will not count as part of pensionable earnings within the company scheme. Scheme rules will need to be explored, and revisited and redefined so that the employee does not find that the occupational scheme will not provide as much as expected at retirement.
Employee Class 1 NICs
Employee whose earnings are between the primary threshold and the UEL will potentially save 12% in NIC contributions on the sacrificed amount.
An employee whose earnings are above the UEL will only receive a 2% marginal benefit in NICs savings for any sacrifice. An employee with earnings that go below the lower earnings limit (LEL) may lose entitlement to contributory benefits such as SSP, SMP, SPP, ShPP and SAP and other contributory state benefits such as Maternity Allowance and those for payment to the unemployed.
Although employers may want to preserve the original entitlements relating to maternity, paternity, parental and adoption payments made by them whilst the employee is in employment, an employer is only allowed to make a recovery from the Government for the reduced statutory amounts based on the sacrificed salary, not the original notional salary (in other words, the 92% recovery can only be made on the earnings based on the NI-able average earnings, not the notional salary or any sacrificed amount which is not NI-able under primary employee Class 1 NICs). This applies even for items which are subject to tax and Class 1A NICs as a result of the OpRA provisions.
Benefits of salary sacrifice arrangements
The benefits of operating salary sacrifice arrangements have been limited by the application of OpRA rules; there continue to be National Insurance savings for employees and a number of exempted benefits which continue to achieve tax savings and employer NICs savings. Salary sacrifice (and other OpRA arrangements) provides two main benefits:
- The employer may have the buying strength to negotiate bulk discounts from suppliers (eg retail vouchers, travel insurance, private health cover) and is able to pass on a reduction to employees that they would not receive if they purchased privately themselves.
- Because the selection of the benefits is undertaken through a salary sacrifice, a limited number of resulting employer-provided benefits may be non-taxable and/or non NI-able, this saves the employer and the employee money. Some employers may pass on part of their NICs saving by subsidising the cost of the benefit (e.g. employer pension or stakeholder pension contributions and employer provision of childcare facilities or non-cash childcare vouchers). Under the OpRA rules, employees only save an amount of primary Class 1 NICs.
Conclusion
The concept of Salary Sacrifice is easily misunderstood. The consideration that the employee is buying nothing and but undertaking a contractual pay cut results often in mind boggling complexities. The application of the OpRA rules from 6th April 2017 and the conclusion of grandfathering on 5th April 2021 have seen drastic employer review of salary sacrifice, flexible benefit and cash alternative benefit schemes. Many former options are likely to have been revised and some removed.
Equally the rapid rise in National Minimum Wage and National Living Wage rates has removed many lower paid employees from being able to participate in salary sacrifice arrangements. The risk and consequent legal action of employer breaching National Minimum Wage Law is an important consideration.
It is essential to ensure that employers correctly construct their schemes so that they do not fall foul of HMRC rules, and that employers have the correct contractual changes in place and fully inform employees of the implications of using salary sacrifice correctly and of the impacts of the OpRA provisions.
Useful websites and documents
Information in relation to the tax and NICs position of benefits in kind are developing all the time. Employers and benefits professionals need to ensure that they keep up to date with the latest information, options and restrictions that may apply.
The following web links offer guidance in relation to the operation of salary sacrifice schemes and other ‘optional remuneration arrangements’:
Author – P. Simon Parsons MSc FCIPPdip MBCS – Director – PAYadvice Ltd
Simon has been a major contributor to UK payroll expertise since 1984 when he originally joined the Nat West Bank – Centrefile payroll Service. He has been associated with payroll providers Ceridian, Cyborg and SD Worx. He formed PAYadvice Ltd in April 2019.
Besides being influential in the development of payroll software and services, Simon is a major presence on a number of HMRC and government consultative groups and committees.
A fellow of the Chartered Institute of Payroll Professionals and one of the original Masters of Science in Payroll Management, Simon is a regular author and speaker on payroll matters. He is also Chair of IReeN, the electronic exchange with government user network, and chair of the BCS (the chartered institute for IT) Payroll Group.
Simon has won several awards in the past, including the Strathearn Award for Lifetime Achievement at the 2012 Pay & Benefits Awards, the Payroll Alliance Award for Advancing the Payroll Profession in 2010 and IPP Person of the Year in 2006. In 2022 he was awarded the Payroll Guru award by the Payroll Leader WhatsApp group. He is member of the Reward 300.
PAYadvice articles on Salary Sacrifice and Optional Remuneration Arrangements
The following articles have been published by PAYadvice.UK on Salary Sacrifice and Optional Remuneration Arrangements (OpRA):
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DonateDonate monthlyDonate yearlyPAYadvice.UK 8/7/2023 last updated 14/7/2023