Optional remuneration arrangements: definition
Section 69A 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arrangements under which the employee gives up the right to an amount of earnings in return for a benefit are largely withdrawn.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.
This change has been made to redress the advantage that use of these arrangements allowed. Employees would pay less Income Tax and NICs compared to what they would have paid if they’d been paid entirely in cash.
The legislation provides that benefits provided under optional remuneration arrangements no longer benefit from the Income Tax and NICs advantages previously available under salary sacrifice arrangements. In this context, salary sacrifice includes benefits in kind with a cash allowance option and flexible benefits packages with a cash option.
For the purposes of the benefits code, a benefit is provided under an optional remuneration arrangement if it is provided under an arrangement of either type A or type B.
Type A arrangement
Type A arrangements are arrangements under which the employee gives up the right, or the future right, to receive an amount of earnings which would be chargeable to tax applying the definition in section 62 ITEPA 2003 in return for the benefit.
Type B arrangement
Type B arrangements are arrangements, other than type A arrangements, under which the employee agrees to be provided with a benefit rather than an amount of earnings within section 62 of ITEPA 2003.
Where an employee chooses a benefit instead of some form of cash pay, the value of the benefit treated as earnings from the employment is the greater of the amount of cash pay given up and the taxable value of the benefit under the normal benefit in kind rules. Where the two are the same, then apply the normal benefit valuation rules.
A benefit provided under an optional remuneration arrangement includes any benefit or facility, regardless of its form and the manner in which it is provided. However, this does not include arrangements under which the employee reduces their working hours or becomes entitled to additional unpaid leave. The employee is simply reducing their working hours and having their pay adjusted accordingly. Similarly, where an employee’s pay is reduced because of changes to their working pattern they’re not being provided with a benefit. For example, where an employee loses their shift allowance because they no longer work shifts.
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.