EIM44120 - Optional remuneration arrangements: employment-related benefits

Section 203A ITEPA 2003

From 6 April 2017, the Income Tax and NICs advantages where benefits are provided through arrangements in which the employee gives up the right to an amount of earnings in return for a benefit are largely withdrawn. Guidance on optional remuneration arrangements from 6 April 2017 starts at EIM44000.

Transitional provisions apply for a limited period. For further details see EIM44030.

Certain benefits in kind are excluded from the changes. For further details see EIM44130.

Where employment-related benefits that are taxable as general benefits under Chapter 10 of Part 3 of ITEPA are provided to employees under an optional remuneration agreement the normal method of working out the cash equivalent for those benefits does not apply. The relevant amount to treat as earnings from the employment for that tax year is the greater of:

  • the cost of the benefit, and
  • the amount foregone with respect to the benefit

When determining the taxable value of the benefit and whether to use the cost of providing the benefit or the amount foregone, do not account for any amount made good by the employee. However, if any amount has been made good by 6 July following the end of the tax year in which the benefit was provided, deduct this from the relevant amount in determining the amount chargeable to tax.

Example 1

An employer provides an employee with medical insurance costing £500. The employee is required to sacrifice salary of £600. The relevant amount is £600, being the greater of the cost of providing the benefit and the amount foregone. If the employee then made good an amount of £100 within the time permitted, the amount chargeable to tax would be reduced to £500.

If it becomes necessary to apportion an amount of earnings to the benefit, make the apportionment on a just and reasonable basis.

Section 221 ITEPA covers payments where an employee is absent because of sickness or disability. Section 202 treats the provision of a right to receive such payments as an excluded benefit so it is not charged to tax as a benefit in kind in the normal course of events. However, where provided under optional remuneration arrangements, the right to receive sickness absence payments is not treated as an excluded benefit. The relevant amount to treat as earnings from the employment is worked out as set out above.

Example 2

An employer arranges sickness absence cover for its employees through an insurance policy in favour of its employees to pay out an amount to them as sick pay. The employer arranges a basic level of cover for its employees without requiring its employees to contribute. However, the employer arranges a higher level of sick pay that costs it £40 for employees who sacrifice salary of £50 to cover the additional premium. The basic level of cover is an excluded benefit. However, the employee will pay tax on £50 for the higher level of cover. Since that part of the benefit is provided under optional remuneration arrangements, it’s not an excluded benefit.