Optional Remuneration Arrangements – what will be the tax on that?

10 April 2018

Effective from 6th April 2018, employers must report all Benefits in Kind (“BiKs”), including those paid under the Optional Remuneration Arrangements (“OpRAs”), to HMRC on form P11D unless they are registered to voluntarily payroll benefits.

An OpRA is where an employee gives up the right to an amount of earnings in return for a BiK and includes flexible benefit packages with a cash option, cash allowances and salary sacrifice. A benefit is provided under an OpRA if it is provided under an arrangement of either of the following;

Type A

An employee gives up the right, or the future right, to receive an amount of earnings (for example salary) which would be chargeable to tax under Section 62 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) in return for the benefit.

Type B

An arrangement, other than a type A arrangement, which an employee agrees to be provided with a benefit rather than an amount of earnings (for example the option of a cash allowance). 

In accordance with Schedule 2 Finance Act 2017, in order to restrict the tax advantages which were available under salary sacrifice arrangements, the rules on calculating the value of a benefit were changed. Effective 6th April 2017, the taxable value of a BiK which is provided under the OpRA rules, should now be calculated as the higher of;

  • The cash forgone (the amount of money sacrificed in order to receive the benefit)
  • The taxable value under the normal BiK rules

This now applies to all BiKs, including those that were previously exempt, such as workplace parking.

Where the employee entered into the OpRA before 6 April 2017 transitional rules may apply. Subject to certain limited exceptions, arrangements entered into before 6 April 2017 are still covered by the normal benefit valuation rules until the earlier of:

  • variation, renewal or modification of the arrangement
  • 6 April 2018

Those exceptions are cars with emissions of more than 75g CO2/km, living accommodation and school fees which are all protected until the earlier of:

  • a variation, renewal, modification of the arrangements
  • 6 April 2021 (Special rules also apply for school fees)

P11D Accuracy

Employers must ensure that they complete their P11D accurately.  See this guidance on how to complete the form.

The closing date for employers to send P11Ds to HMRC is 6 July 2018.

Aspire Comment

Although these rules came into force in April last year, most arrangements were not affected until the start of to 2018-19 tax year.

Any employer operating an OpRA, needs to ensure that they;

  • Complete their reporting requirements by 6 July 2018
  • Alert the employees who are affected as you may want to consider amending arrangements and/or policies to mitigate any tax impact

If you would like to discuss the new rules and the potential impact it could have on your contractual arrangements with employees, please get in touch.