Prepare for Implications of 'Optional Remuneration' Changes
Dated: 9 February 2018 Author: Jack Bonehill, Employment Taxes Consultant
Tax rules around the ‘optional remuneration’ of employees were changed with effect from April 2017.
Optional remuneration is where an employee agrees to either give up part of their earnings in return for a benefit or where the employee agrees to receive a benefit rather than an amount of earnings.
These rules were changed by government to remove the tax savings obtained by an employee being provided with a benefit, such as a company car, instead of cash by their employers. One way in which employers could do this before the changes is by using ‘salary sacrifice’ arrangements.
It is important that employers are aware of how the changes affect them. Not understanding the changes could lead to incorrect P11D submissions, understated tax and NIC liabilities, and to interest and penalty charges. Furthermore, not acting upon the changes could lead to inefficient tax planning.
The changes mean, with some exceptions, where an employee can choose between cash and a benefit, they are now taxable on the higher of the cash equivalent of the two.
Outside scope of the new rules are arrangements relating to:
- Pension contributions
- Childcare vouchers
- Cycle to work schemes
Outside of scope for 2017/18 where the optional-remuneration arrangement for specific employees has been in place since before April 2017 and there have been no changes:
- Living accommodation
- School fees
The example below outlines the tax differences between the rules pre-April 2017 (‘the old rules’) and the rules post-April 2017 (‘the new rules’).
John works for ABC Ltd and is a basic rate tax payer, and therefore pays tax at 20%. ABC Ltd offer John the choice between whether ABC Ltd give him a company car or a cash allowance instead. If John takes the cash allowance option, he will receive an extra £750 per month on top of his salary (£9,000 per year). The car has a cash equivalent value of £6,250 per year. John decides to take the company car option.
Since John has the choice between cash and a benefit (i.e. the car), the new rules for optional remuneration apply. This means the taxable amount for the car is the higher of:
- The amount of the cash alternative (£9,000)
- The cash equivalent of the car (£6,250)
The higher amount is the cash alternative of £9,000. Under the old rules, the taxable amount would instead be the cash equivalent of the car of £6,250.
Since John is a basic rate taxpayer, he therefore pays tax of 20% of the taxable amount. ABC Ltd must pay employer Class 1A National Insurance of 13.8% of the taxable amount.
The table below indicates the tax and National Insurance due under the old and new rules:
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