New Rules For OpRa, Terminations, Pensions And Childcare

With new legislation in place, employers must get to grips with a range of tax and compliance issues concerning optional remuneration arrangements and more...

Optional Remuneration Arrangements (OpRA)

From 6 April 2017, legislation changes were introduced which mean that the tax and NICs savings where benefits are provided through salary sacrifice arrangements are largely withdrawn.

The new legislation means that benefits provided under so-called ‘optional remuneration arrangements’ no longer benefit from the potential income tax and NICs advantages previously derived through salary sacrifice arrangements. Salary sacrifice in this instance includes both benefits in kind with a cash allowance option and also any flexible benefits packages with a cash option.

HMRC consider that a benefit is provided under an OpRA if it is provided under either a type A or type B arrangement. HMRC define these arrangements as follows:

  • type A arrangements are arrangements under which the 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 ITEPA 2003 in return for the benefit
  • type B arrangements are arrangements, other than type A arrangements under which the employee agrees to be provided with a benefit rather than an amount of earnings (for example the option of a cash allowance)

Under circumstances where an employee chooses a benefit instead of some form of cash pay, the taxable value of the benefit is the greater of the amount of cash pay foregone (given up) and the taxable value under the normal benefit in kind rules. Where these two values are the same, then you should apply the normal benefit valuation rules.

A benefit provided under an OpRA includes “any benefit or facility, regardless of its form and the manner in which it is provided”.

Transitional provisions apply for a limited period and certain benefits are excluded from this change.

Where a benefit is provided under an OpRA, the amount of earnings foregone in return for the benefit provided is “the amount of cash pay given up by the employee in return for the provision of the benefit or the amount of cash pay that the employee could have received instead of that benefit”.

If a number of separate benefits are provided under an OpRA, the employer and employee will generally be aware of the value of the cash foregone for each individual benefit and the employer should be able to identify and report the appropriate value. However, if the amount given up for each benefit is not identified separately, the value should be apportioned in a “just and reasonable“ manner, whilst ensuring that the total equals the total of the amount foregone.

Where the employee’s right to a cash allowance (type B) is removed, the employee will no longer have type B optional remuneration arrangements. The cash equivalent of any benefit provided will be taxed on the normal rules.

It is possible for some employees to have both type A and type B arrangements, so where a benefit is provided partly in exchange for the employee foregoing an amount of salary and partly in exchange for foregoing the option of a cash allowance. Where this is situation arises, the amount foregone is the total value of the type A and type B arrangements.

So, for example, an employee has the option of a cash allowance of £4,500 (type B) which he agrees to give up in return for a company car. The employee also wants a higher specified car costing a further £1,500. So, he also gives up £1,500 of salary (type A). The amount foregone is £4,500 plus £1,500.

Under HMRC’s transitional arrangements, many arrangements entered into prior to 6 April 2017 will continue to be subject to the pre-2017 benefit valuation rules until the earlier of:

  • variation, renewal (including auto-renewal) or modification of the arrangement or
  • 6 April 2018

Where the benefit provided is a car with emissions of more than 75g CO2/km, living accommodation or school fees, transitional rules apply for a longer period. The new OpRA regulations will not apply to these particular benefits until 6 April 2021.

Where employees vary or renew their arrangements on or after 6 April 2017 the transitional provisions mean that the date of change or renewal is taken as the date the new rules apply from. This means the transitional arrangements no longer apply from that date.

An OpRA arrangement is not considered to have been varied if any variation to the arrangement is only as a result of accidental damage or otherwise for reasons beyond the control of the parties.

Variation of an arrangement is also disregarded where the variation is in connection with an employee’s entitlement to statutory sick pay, statutory maternity pay, statutory adoption pay, statutory paternity pay or statutory shared parental pay.

Where the benefit provided is reduced school fees or a free school place in a fee paying school, as long as the original arrangement was entered into prior to the 6 April 2017 even where a new contract is entered into, the transitional provisions will continue to apply until 5 April 2021 provided the new contract relates to:

  • the same employment with the same employer
  • the same school
  • the same child

Cash vouchers

Where an OpRA is used to provide cash vouchers to an employee, the amount to be treated as earnings is the greater of:

  • the cash equivalent (the sum of money for which the voucher can be exchanged)
  • the amount the employee has foregone in relation to the benefit of the voucher

Non-cash vouchers

Where an OpRA is used to provide non-cash vouchers to an employee, the amount to be treated as earnings is the greater of:

  • the cost of providing the voucher
  • the amount the employee has foregone in relation to the benefit of the voucher

When trying to determine the taxable value of the benefit, and whether to use the cost of providing the benefit or the amount foregone, any amount made good by the employee should not be taken into account. However, if any amount has been made good by the employee this should be deducted from the relevant amount.

An example of this is as follows:

  • An OpRA allows employees to give up £50 of salary each month in return for £50 in non-cash vouchers.
  • The employer has manages to purchase these vouchers at a discounted cost of £45.
  • Under the new OpRA rules, the taxable value of the benefit for the tax year is £600.
  • This is the greater of the cost of providing the vouchers - £540 (£45 x 12) and the amount of salary sacrificed by the employee - £600 (£50 x 12).

Living accommodation

Where an OpRA is used to provide an employee with living accommodation, the relevant amount to be treated as earnings from the employment is the greater of:

  • the modified cash equivalent of the benefit
  • the amount foregone in relation to the provision of the benefit

The ‘modified cash equivalent’ in this case means:

  • for living accommodation where the cost of providing it is not over £75,000, the rental value of the accommodation for the taxable period
  • for living accommodation where the cost of providing is more than £75,000, the sum of the cash equivalent in steps 1 to 3 in Employment Income Manual EIM11480
  • This means that when determining the value of the modified cash equivalent to be compared with the amount foregone, do not deduct any rent paid or amount made good.

Cars made available for private use

The new OpRA regulations do not apply to cars with emissions of 75 grams CO2 per kilometre or less. These cars continue to be taxed on the cash equivalent of the benefit without having to make a comparison with the salary foregone.

Cars made available for private use under an OpRA, where the car has emissions of more than 75 grams CO2 per kilometre are within the scope of the new OpRA regulations.

The relevant amount to be treated as earnings from the employment is the greater of:

  • the modified cash equivalent of the benefit
  • the amount foregone in relation to the provision of the benefit

The modified cash equivalent in this case means the amount which would be the cash equivalent under the normal method but ignoring any capital contributions made by the employee and any payments the employee is required to make for private use.

Once the relevant amount has been determined a deduction is then made for any capital contribution. This is given by multiplying any capital contribution (up to the maximum of £5,000) by the appropriate percentage. A deduction is then given for any private use contribution.

P11D forms will be revised for 2017/2018 reporting to include “amount foregone” or “relevant amount” as a result of the OpRA legislation. When the forms are being prepared, the employer will need to look at the cost of the benefit as usual, but also the amount of cash that the employee has foregone where a benefit is provided under a salary sacrifice arrangement.

If activpayroll are assisting with the preparation of forms P11D for your employees, you will be required to provide additional information if any benefits have been provided under an OpRA.

Treatment of termination payments

With effect from April 2018, there will be significant changes to the taxation of some termination payments, specifically where there is an element of Pay in Lieu of Notice (PILON).

The taxation of PILON payments has always been a confusing area, and depended very much on whether the payment was contractual or non-contractual, and in some cases the taxation hinged on whether it was customary for an employer to pay PILON on termination. The Office of Tax Simplification have now tried to make the rules easier to understand, and have now removed the distinction between contractual and non-contractual PILON.

Employers will have some new terminology to learn, including “termination award”, “post- employment notice pay” and “trigger date”. There is now also a prescribed calculation for “post- employment notice pay”.

In addition to these changes, from April 2018 the exemption for foreign service has been removed, and the exemption for injury payments no longer applies to payments for injury to feelings.

The proposed change to apply employer only Class 1A NIC to termination payments in excess of £30,000 has been put back for another year, and is now likely to be introduced with effect from April 2019.

So, for the time being, the main changes to the way termination payments are calculated and taxed are as follows:

Termination payments or ‘relevant termination awards’ are split into two elements:

  • Post-employment notice pay (PENP) which is subject to tax and
  • Termination awards subject to the £30,000 tax exemption

The new rules lay out guidelines (and a formula) for calculating each amount.

  • If the PENP is equal to or more than the total amount of the termination payment, then all will be subject to tax.
  • If the PENP is less than the total amount of the termination payment then only the PENP is subject to tax, with the remainder coming within the £30,000 exemption.

So, the formula is:

                (BP x D) – T

                      P        

Where

  • BP is the employee’s basic pay
  • D is the number of days in the post-employment notice period
  • P is the number of days in the pay period
  • T is the total termination payment.

Basic pay (BP)

The definition for basic pay in this context excludes

  • Overtime
  • Commission, bonus, gratuity or allowance
  • Payments connected with the termination
  • The cost of any benefits in kind
  • Securities, options and some other more complex elements (check the guidance on the Gov.uk website for more detail).

The basic pay amount to be used is the amount paid in the last full pay period that ends before the ‘trigger date’.

The ‘trigger date’ is either the day the notice was given, or, where no notice was given, the last day of employment.

Days (D)

These are the number of days in the post-employment notice period, that is, the time between the last day of employment and the earliest lawful termination date (either contractual or statutory).

So, for example,

  • An employee has been employed for one year.
  • His employment is terminated 15 April 2018 with no notice given.
  • Though his employment contract does not provide for a notice period he is entitled to a statutory notice of at least one week.
  • The last day of employment is the day that employment is terminated and the post-employment notice period is seven days.

Another example is:

  • Your employee has an employment contract that stipulates a 30 day minimum notice period.
  • The employer gives notice to the employee on 5 June 2018 that her employment will be terminated 15 June 2018 (so 10 days)
  • As the employee is entitled to a notice period of 30 days the PENP (P) is 20 days.

Pay period (P)

This is the number of days in the employee’s last full pay period ending before either:

  • The last day of employment or
  • The day termination notice was given, whichever is the earliest.

If there is no full pay period prior to the above then P is the total number of days worked.

Total termination payment (T)

This is defined as ‘the total of the amounts of any payment or benefit received in connection with the termination that:

  • is taxable as earnings
  • is not pay for holiday entitlement taken before the employment ends, and
  • is not a bonus payable for termination of the employment

An example

  • So, the formula is:

                (BP x D) – T

                      P        

  • Your employee earns £24,000 per annum and their employment contract stipulates a 30 day minimum notice period.
  • You give notice to your employee on 18 July 2018 that their employment will be terminated 25 July 2018. (7 days’ notice)
  • The total termination payment, including salary is £6,000. The taxable and non-taxable pay elements will be:

                (£2,000 x 23) - £6,000

                         30

In this example, the £1,533.33 PENP is taxable and £4,466.67 (£1,533.33 – £6,000) falls within the £30,000 tax exemption.

We will leave it to you to decide whether this is simpler than the previous system.

Pension minimum contribution levels

All employers should now be familiar with the concept of auto-enrolment, and some companies are now going through the re-enrolment process as they have been required to provide a workplace pension for 3 years.

There are changes to the minimum contribution level that take effect from 6th April 2018 and then from 6th April 2019, and these are as follows:

 

These levels are quite a significant increase, and for any activpayroll clients, your payroll teams will be contacting you to discuss any changes that are required from April 2018.

 

Childcare Vouchers

As the Government are introducing their new “Tax Free Childcare” scheme, which is intended to bring the tax saving benefits of the childcare voucher scheme to a wider audience, it had been announced that the existing childcare voucher scheme would be closed to new entrants from April 2018.

On Tuesday 13th March, the Government confirmed that they have extended the childcare voucher scheme for a further 6 months. This change means that the existing scheme is open to new members until October 2018.