It’s pay review time and you’re looking for ways to keep costs down but make your employees happy. How can salary sacrifice help your cause?
Salary sacrifice and other OpRAs
You’ve probably heard of salary sacrifice, which HMRC calls optional remuneration arrangements (OpRAs). The main feature of OpRAs is that an employee receives a low or zero tax benefit in kind in exchange for giving up some of their salary. To counter this unfair (in HMRC’s eyes) tax avoidance, special rules were introduced in 2017. These eliminate the income tax and employers’ NI advantage of OpRAs.
Tip. The anti-avoidance rules don’t apply to some types of OpRA. For example, those where an employer pays for pensions advice or provides a bike to an employee through a cycle-to-work scheme.
Tip. Even if the OpRA rules apply there’s still a financial advantage for employees. This is achieved because, unlike salary, employees don’t pay NI on the benefits in kind. An OpRA can therefore save an employee whose salary is no more than the NI upper limit (£50,270 for 2024/25), 8% of the value of the benefit or 2% if their salary is greater.
Benefits instead of pay
What’s often overlooked is that it’s still possible for you to offer tax and NI-efficient perks as an alternative to a salary increase (but not a sacrifice of existing salary) without being caught in the OpRA trap. The OpRA rules apply in two situations; these are described as types A and B:
Type A. These are arrangements under which an employee gives up the right, or the future right, to receive an amount of cash earnings, e.g. salary, chargeable to income tax in exchange for one or more benefits in kind.
Type B. These are arrangements under which the employee is given the choice by their employer between earnings and a benefit and opts for the benefit.
Tip. It’s easy to think that the OpRA rules prevent you from providing tax and NI-efficient benefits instead of salary. They don’t. If an employee doesn’t have the right to choose between receiving salary or benefits then neither A nor B applies and so the benefits aren’t subject to the OpRA rules.
Example. Acom is in the process of reviewing its employees’ salaries for 2021. The last 18 months have been financially tough for the business but it wants to reward its employees who have all worked hard to keep the business going. To keep down the cost of increased remuneration for its workers Acom wants to offer them benefits in kind instead. It surveys its employees to find out what types of perk they would like. Acom rewards its employees with their preferred benefits. Because the employees had no choice between a salary increase or the benefit the OpRA rules don’t apply.
Tip. The arrangement in our example shows the whole “pay” increase given in the form of benefits. However, Acom could give it part in salary and part in benefits without triggering the OpRA rules, as long as its employees don’t have a choice about which they receive.
In summary the rules don’t prevent you from saving costs by offering your employees tax and NI-efficient benefits instead of salary. The rules only apply where your employee can choose between the two. This means that tax and NI savings can still be made by giving employees perks in place of all or part of a salary increase.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.