Question – When does an OpRA have no music?
In our last Blog, my colleague Stuart suggested a Cycle to Work scheme as a way of achieving higher levels of sustainability within your business. Well with April seeing us all hit with a significant increase in National Insurance, then it makes sense for employers to investigate how salary sacrifice and optional remuneration arrangements (OpRA) could benefit your business and your team.
Salary sacrifice is a well-known, if often misunderstood concept, but optional remuneration arrangements less so.
Salary sacrifice
Strictly speaking, salary sacrifice refers only to the what are described as the “carved-out benefits” that HMRC did not include in the OpRA changes that took effect back in 2017.
These are:
• pensions and pensions’ advice
• employer supported childcare (if the employee was a member of an employer’s scheme prior to 4 October 2018)
• cycle-to-work
• holiday purchase
• green’ company cars <76g/km
• outplacement support and counselling
OpRA
OpRA refers to all other benefits in kind offered in exchange for giving up current, or future, cash and there are two types of arrangement, type A and type B.
A type A arrangement is where an employee gives up some cash salary in exchange for a benefit in kind such as reducing their salary in exchange for a company car.
A type B arrangement is where an employee chooses a benefit in kind and, in so doing, gives up a future cash allowance, such as choosing a company car and therefore not receiving a cash car allowance.
Understanding the difference does matter as where salary sacrifice could mitigate the National Insurance increase this month, this may not be the case where the OpRA route is chosen, as the calculation of the benefit in kind is different in such contractual constructions which then will impact the Class 1A employer-only National Insurance charge.
The value of using the carved-out benefits is that, with the exception of low-emission cars, the benefits in kind are all tax exempt, so the reduction in cash salary drives an absolute saving in tax and National Insurance for the employee, and National Insurance and apprenticeship levy for the employer, with no P11D exposure.
Where a benefit in kind is provided as a type A or type B arrangement, there is an additional step in calculating the P11D benefit, which would be handled by us as your accountant.
Whether the benefit in kind is provided under the carved-out benefits or OpRA rules, it is a contractual reconstruction. It is not simply a case of showing the benefit in kind as a deduction on the employees’ payslips and there must be an audit trail showing that the contractual pay given up is dated before the payday that the sacrifice takes place, and therefore the reduced pay is then subject to PAYE.
This is something that your payroll provider will be able to do for you and the payslip should show a reduction on the gross pay side of the payslip, reflecting the reconstruction of the contract.
At the same time that the NIC increase is here, so is the higher levels of minimum wage and employees looking to participate in a salary sacrifice scheme cannot do so if the sacrifice reduces their pay below the new national minimum wage rate appropriate to their age.
I have only covered the basic points here and there are some technical tax considerations that must be investigated in every case, but if you felt that this was of interest, then talk with a MAP Finance Partner.
I would also suggest that it would be prudent to include in any contract changes that are being negotiated, a statement to the effect that the employer has the right to withdraw offering the benefit in kind through salary sacrifice/OpRA should legislation change in the future. This will ensure that if the employer National Insurance saving were to be reduced, or even disappear, then as the employer, you are not locked into providing the benefit in this way.
