Some salary sacrifice schemes, cash allowances and cash alternatives now fall under the catchy heading of ‘Optional Remuneration Arrangements’ or OpRA for short. The government introduced OpRA to simplify the taxation of these arrangements and to make the system fairer, whether it has achieved this aim is subject to debate.
OpRA applies where an employee forgoes cash in exchange for a Benefit in Kind (BiK). Prior to OpRA employees and employers could swap between cash pay and a BiK, which would normally be untaxed or taxed significantly less.
“The OpRA addressed this unfairness, helping to level the playing field,” an HMRC spokesperson told the Learn Centre.
OpRA removes the tax incentive and requires employers to calculate tax and National Insurance at the ‘higher of’ either:
1. The amount of cash forgone OR2. The amount calculated under existing BiK rules.
The measures affect salary sacrifice benefits such as health checks, gym memberships, car parking near the workplace, mobile phones and other technology, accommodation, school fees and cars, although with the last three there are other transitional rules. The only salary sacrifice schemes not caught by OpRA are those that fall under the exemption, which are: pensions and pensions advice, childcare, cycle-to-work schemes and ultra-low emissions vehicles.
Although OpRA was introduced in April 2017, anyone who was already in a scheme was not subject to the new rules until the earlier of: an end, change, modification or renewal of the contract or 6 April 2018. However, cars and accommodation have been extended until 6 April 2021 or until they renew before this date and school fees can continue to this date and be renewed prior to it.
Most arrangements should now fall under OpRA and all those submitting P11Ds under the new rules will do so for the first time this July. According to HMRC, OpRA was designed to be as simple as possible, while reflecting commercial realities.
“As such, the comparison is normally between the traditional taxable value and the cash given up or, for untaxed BiKs, it’s just the value of the cash foregone,” said a HMRC spokesperson.
Despite these claims of simplicity, Susan Ball, Partner, National Head of Employers Advisory Services at Crowe Clark Whitehill said that, for many employers the rules have been far from simple. “It’s [OpRA] just made it more complicated for employers to get it right. In addition, it’s not clear to employers the impact on cash alternatives and when these rules might apply,” she said.
Dianne Hoodless, EMEA Payroll Manager at Hyperion Group, agreed: “To begin with I found them [OpRA rules] very difficult to understand and how it would affect the business. I understood the example widely used around the car and car allowances but did not understand fully the area around salary sacrifices and how that would change for something like life insurance flex up.”
Many employers have had to rethink the benefits they’re offering. Jim Ross, Head of Pay & Pensions at University of Glasgow, said: “Previously we offered a salary sacrifice for car parking, however, from 6 April 2018 we’ve amended this to a net pay deduction.”
This is just one small example of how some benefit packages are being eroded. The government expects to raise an additional £260 million by 2021/22 due to the extra tax and Class 1A National Insurance contribution (NIC) charges levied by OpRA.
Beyond rethinking the benefits on offer, Hoodless added that OpRA had had an even bigger impact on her organisation. “We have had to change the payroll software and send communications out to employees. It led us down the route of now payrolling all our benefits.”
A year on from the introduction of OpRA and many employers are still grappling with the new rules. HMRC is urging employers to check their remuneration packages to see if they are impacted, this is especially important given that the transitional protection for those already in contracts has now ended.
Ball added: “Employers should immediately focus on:
making sure they have identified all the elements of their salary sacrifice and cash alternative arrangements which are affected by the new rules tracking arrangements to determine when OpRA applies e.g. at start of employment, annual renewal, variations etc. tracking changes such as a part year covered by the transitional rules and the remainder within OpRA calculating the reportable amount checking that systems and processes are capable of supporting the required calculations making sure communications to employees are clear on the tax and NIC position ensuring that employees are notified when a variation is made to a salary sacrifice contract and the possible impact on their Pay As You Earn tax codes seeking specialist advice if required to ensure they remain compliant with the new rules.”OpRA is yet to bed-in and is causing plenty of headaches, especially around cash allowances and cash alternatives where an employee might end up with a higher tax liability to pay.
The Learn Centre is running a half-day course on OpRA to help employers implement the new rules. The course will give delegates the confidence to review all current and future salary sacrifice arrangements and ensure they are compliant with the new rules and correctly reporting to HMRC.
