EIM44020 - Optional remuneration arrangements: the amount foregone

Section 69B ITEPA 2003

From 6 April 2017, the Income Tax and NICs advantages where benefits in kind are provided through arrangements under which the employee gives up the right to an amount of earnings in return for a benefit are largely withdrawn.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.

Where a benefit is provided under an optional remuneration arrangement, the amount of earnings foregone in relation to the benefit that is provided means the amount of type A or type B earnings. This is the amount of salary or cash given up by the employee in return for the provision of the benefit or the amount of cash pay that the employee could have received instead of that benefit.

If it becomes necessary to apportion an amount of earnings to the benefit, the apportionment is to be made on a just and reasonable basis. For example, where a number of separate benefits are provided to an employee in conjunction with optional remuneration arrangements, usually the employer and the employee will be well aware of the value of the salary or cash given up for each respective benefit and the employer should be able to report the appropriate value. However, where the amount given up for each benefit is not separately identified, the value should be apportioned on a just and reasonable basis taking into account the facts and circumstances, as long as the total equals the total of the amount foregone.

Example 1

An employer provides its employees with a package of benefits with a total cost of £500 including medical insurance, life assurance and gift vouchers for a national retailer. These are bought by the employer in bulk at a discount to face value applying its bulk purchasing power. Employees are required to sacrifice salary of £600 to access these benefits. In these circumstances, if it becomes necessary to apportion the amount foregone, it may be reasonable to apportion by reference to the cost to the employer of providing the underlying benefit.

Earnings has the same meaning as in EIM00520, and includes a reference to amounts which would have been earnings if the employee had received them.

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 the right to a cash allowance (type B) is removed so the employee no longer has the option of such an allowance, the employee will no longer have optional remuneration arrangements. The cash equivalent of the benefit is taxed under the normal rules.

Example 2

An employee has the option of a cash allowance of £300 or private medical insurance that costs the employer £280. Because the medical insurance is provided under optional remuneration arrangements, the taxable value of the benefit is £300, the amount foregone. The employer reviews its remuneration structure next year and decides to provide private medical insurance to all of its employees and withdraws the cash allowance option. The benefit is now taxed on the cost of the private medical insurance of £280 because it’s no longer provided under optional remuneration arrangements.

However, where an employee is tied in to giving up a cash allowance in exchange for a benefit for a number of years, the employee will continue to be subject to the optional remuneration arrangement rules for that period.

Example 3a

An employee gives up the right to a cash allowance of £5,000, the amount foregone, in exchange for a car with a modified cash equivalent of £3,500. As the car is provided under an optional remuneration arrangement, the taxable value of the benefit is £5,000. Because of the leasing arrangements, the employer requires the employee to sign up to the arrangement for 3 years. The employee has agreed to give up the cash allowance for 3 years and the agreement will be subject to the optional remuneration arrangement rules for that period.

Example 3b

The employee has reached the end of the 3 year lease arrangement as per example 3a. The employer provides the employee with a new car. Where the employee no longer has the option of a cash allowance, the car benefit is not provided under an optional remuneration arrangement. The taxable value of the benefit is worked out under the normal car benefit rules.

Some employees have both type A and type B arrangements under which a benefit is provided, partly in exchange for the employee giving up an amount of salary and partly in exchange for giving up the option of a cash allowance. Where this is the case, the amount foregone is the total value of the type A and type B arrangements.

Example 4

An employee has the option of a cash allowance of £5,000 (type B) which he decides to give up for a car. However, the employee wants a model with leather seats costing a further £1,000. So, he also gives up £1,000 of salary (type A). The amount foregone is £6,000 (£5,000 plus £1,000).