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Optional Remuneration Arrangement

An Optional Remuneration Arrangement (OpRA), more commonly known as ‘salary sacrifice’ is an arrangement between an employee and their employer to be provided with a benefit in kind, rather than the salary equivalent. A benefit is provided under such an arrangement in either of the following circumstances:

  • An employee gives up the right, or the future right, to receive earnings in return for a benefit. This arrangement is more commonly known as ‘salary sacrifice’;
  • An employee agrees to be provided with a benefit, rather than an amount of earnings. This type of arrangement normally arises when an employer is in discussion with a potential employee in respect of their remuneration package.

The chancellor announced in the Autumn Statement 2016, that he intended to crack down on Optional Remuneration Arrangements, as he felt that the current system for tax relief was being abused.

Tax Consequences

Before April 2017, optional remuneration arrangements could be entered into and employers and employees enjoyed the benefit of tax and national insurance savings made by replacing salary with benefits in kind. Employers would save national insurance on the salary sacrificed and the employee would obtain a tax and national insurance saving.

Under the new rules, if a benefit is provided under an optional remuneration agreement, the tax and national insurance savings are now restricted even where salary is replaced with a tax-free benefit (had it been provided outside of an OpRA). By way of example, an employee sacrificing part of their salary for the provision of car parking no longer attracts relief, other than for the employee’s NIC.

The benefit in kind value will now be the higher of:

  • The taxable value; or
  • The cash foregone.

Exclusions

The new rules do not apply to the following benefits:

  • Payments into a registered pension scheme or employer-provided pension advice;
  • Childcare vouchers, workplace nurseries, and directly contracted employer-provided childcare;
  • Bicycles and cyclist safety equipment;
  • Ultra-low emission company cars (emissions of no more than 75g/km).

When does this apply?

The new rules came into effect from 6 April 2017 for any new arrangements and current arrangements where a change, renewal or modification has been made since then. For arrangements in place before that date, which continue to apply without change, the new rules apply from April 2018 with the exception of providing cars emitting CO2 emissions of more than 75g/km, school fees and living accommodation, which will be caught from 6 April 2021.

Example 1:

Michael and Boris have applied to Theresa for a job. She has interviewed both of them and offered them the following remuneration packages:

Michael – A salary of £70,000 along with a company car with a benefit value of £10,000

Boris – Either a salary of £80,000 or a salary of £70,000 with a company car benefit worth £8,000.

 If they both decide to accept the remuneration package of a £70,000 salary and a car, only Boris will be caught in an optional remuneration arrangement. This is because he was given a choice over his remuneration package and Michael was not.

Boris’ P11D form will show a car benefit of £10,000, not £8,000, as the cash foregone amount is higher than the car benefit value. Michael’s P11D will also show a benefit value of £10,000.

Example 2:

Phillip has worked for Take a Chance Limited for a number of years and is on a salary of £45,000. He has now been offered a high emission company car worth a taxable benefit value of £4,000 in exchange for taking a £5,000 pay cut.

Phillip will be taxed on the benefit value of the salary amount given up of £5,000, rather than on the lower benefit value of £4,000.

If you are unsure whether you will be affected by the new rules or would like to discuss this further, please do get in touch.

 

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