In the last few Tax Tuesday pieces we have looked at ways of incentivising employees by using different types of share scheme.
This time, we look at another means of providing tax efficient remuneration to employees, called optional remuneration arrangements (OpRA).
In a competitive employment market, businesses need to show they can be flexible in terms of what they offer to potential employees. The provision of benefits in kind (e.g. pension contributions, company car, private medical) as well as salary is an important part of a remuneration package. OpRA is a relatively new term although the concept has been around for many years.
Known as ‘salary sacrifice’ until a few years ago, the idea is that an employee voluntarily gives up an element of their salary and in return receives a benefit in kind. Traditionally, if the benefit which was replacing an element of salary was subject to a specific tax exemption, tax and national insurance savings could be made.
The effectiveness of ‘salary sacrifice’/OpRA from a tax planning perspective has been eroded considerably by changes introduced in recent years. The effect of the changes is that in essence the employee is now taxed on the higher of the value of the benefit and the salary forgone. However, certain benefits remain unaffected by the new provisions.
The key and probably most popular benefit unaffected by the changes is employer pension contributions. In effect the employee agrees for a reduction in their salary in return for an increase in contributions by their employer to their pension. Within certain limits, pension contributions will attract tax relief whether paid by the employer or the employee. However, there are NIC savings for both the employer and the employee if the contributions are made by the employer directly rather than by the employee.
Other benefits which survive the restrictions referred to above are:
a) The cycle to work scheme – where an employer provides a bicycle with safety equipment to an employee without tax charge if various conditions are met. The bicycle is loaned to the employee, so ownership does not transfer from employer to employee. For the exemption to be available, the benefit must be made available generally to all employees of the employer.
In addition, the cycle or related equipment must be used mainly to travel between home and work or between several workplaces in order to fulfil the duties of employment.
b) Childcare – The tax-free childcare scheme enables the government to ‘top-up’ by 25% payments made by eligible parents into a childcare account up to a maximum of £8,000 per child per year, or £16,000 for a disabled child. Therefore, the support is a maximum of £2,000 per year per child, or £4,000 for a disabled child.
A child is a qualifying child until the last day of the week containing the 1 September after the child’s 11th birthday, or 16th birthday in the case of a disabled child. There is no liability to income tax or NICs under the scheme.
If you would like to discuss any of these ideas further, please contact your relationship principal or email tax@haroldsharp.co.uk.
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