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HMRC internal manual

Employment Income Manual

Optional remuneration arrangements: transitional provisions

Paragraph 62 schedule 2 Finance Act 2017

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arrangements in which the employee gives up the right to an amount of earnings in return for a benefit are largely withdrawn.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.

Subject to certain specific exceptions, optional remuneration arrangements entered into before 6 April 2017 continue to be subject to the normal benefit valuation rules until the earlier of:

  • variation, renewal (including auto-renewal) or modification of the arrangement, and
  • 6 April 2018

Those exceptions are:

  • cars with CO2 emissions of more than 75 grams per kilometre, car fuel, vans and van fuel,
  • living accommodation, and
  • school fees

Where transitional arrangements apply to these exceptions, the new rules come into effect on the earlier of:

  • variation, renewal (including auto-renewal) or modification of the arrangement, and
  • 6 April 2021.

Where the benefit is reduced school fees or a free school place in a fee paying school, provided the original arrangements were entered into before 6 April 2017, even where a new contract is entered into, the transitional provisions will continue to apply until 5 April 2021 provided the new contract relates to:

  • the same employment with the same employer,
  • the same school, and
  • the same child

In determining whether the child remains at the same school, it is the overall identity of the school that is important and not the constituent elements. You should, therefore, treat a child moving from the junior school to the senior school and from the senior school to the sixth form as remaining within the same school.

 

An arrangement is not varied for the purposes of the transitional rules if the variation of the arrangement is only in connection with a replacement because of accidental damage or otherwise for reasons beyond the control of the parties. See examples 3 and 5 below.

Variation of an arrangement is also disregarded if the variation is in connection with an employee’s entitlement to:

  • Statutory Sick Pay,
  • Statutory Maternity Pay,
  • Statutory Adoption Pay,
  • Statutory Paternity Pay, or
  • Statutory Shared Parental Pay.

Where employees change or renew their arrangements on or after 6 April 2017, the transitional rules mean that the date of change or renewal is taken as the date the revised legislation applies from.

 

The following examples illustrate ways in which the optional remuneration arrangements transitional provisions apply.

Example 1

An employer operates a flexible benefits scheme under which employees give up the right to receive salary in return for free car parking near their workplace. Employees have to sign up for 12 months car parking. An employee enters into a 12 month salary sacrifice arrangement starting on 1 January 2017. The benefit will continue to be exempt until the contract comes to an end on 31 December 2017. In December, just before the contract comes to an end, the employee signs up to a further 12 months free car parking. The contract starting on 1 January 2018 is not covered by the transitional rules and will fall within the new rules straightaway.

Example 2

An employee has had a car made available to them by reason of their employment since 6 April 2016 under an optional remuneration arrangement set up to last for 4 years. The car has registered CO2 emissions of 95 grams per kilometre. The transitional rules apply for the duration of the arrangement or until the arrangement changes for another reason. The benefit charge will continue to be charged on the cash equivalent value.

Example 3

As in example 2 above, the employee has the same vehicle, under the same arrangements, but due to a road traffic accident in July 2018 his original car is written off and a replacement is provided for the duration of the arrangement. As the variation in the arrangement was beyond the control of the employee, the revised legislation will not take effect at the date the vehicle is changed. The transitional rules continue to apply.

Example 4

An employee agrees with their employer to vary their employment contract so their salary is reduced by £500. At the same time the employer agrees to provide the employee with medical insurance that costs it £400 for 12 months. The agreement is entered into by the employer and employee on 1 February 2017.  However, under the terms of the agreement, the employee’s salary is not reduced until 1 May 2017 which is the date when the medical insurance cover starts. Although the arrangements do not come into effect until 1 May, the employer and employee entered into the arrangements before 6 April 2017. Therefore, the transitional rules may apply and the new rules apply from 6 April 2018.

Example 5

A company’s business is taken over by another company and all of its staff are transferred under the TUPE transfer rules. The optional remuneration arrangements entered into with the first company are transferred to the new employer. The arrangements are amended to reflect the new employer. The original employer entered into the arrangements with the employee before 6 April 2017. The variation was beyond the control of the employee and the transitional arrangements continue to apply.

Example 6

An employee enters into a salary sacrifice agreement with their employer for a car before 6 April 2017. Under the terms of that agreement, the amount of salary sacrificed is linked to the employee’s mileage in the car. The amount sacrificed is based on a mileage estimate. The original estimate turns out to be too low and under the terms of the agreement an additional amount is sacrificed. This is part and parcel of the original agreement and is not a variation of the contract and does not affect transitional arrangements.

Example 7

An employee is entitled to a yearly cash allowance of £600 which they give up for the benefit of private medical insurance. They entered into these arrangements before 6 April 2017 and the transitional provisions apply. On promotion their cash allowance entitlement increases to £800. They decide to increase the level of their health cover. They agree with their employer to give up the additional cash allowance and to amend their medical insurance to the next higher level of cover. The optional remuneration arrangements were varied on promotion and the transitional provisions no longer apply from the date of the variation.

Example 8

An employee is entitled to a yearly cash allowance of £600 which they give up for the benefit of private medical insurance. They entered into these arrangements before 6 April 2017 and the transitional provisions apply. Under the terms of their original optional remuneration arrangement and their original medical insurance contract, the level of cover is automatically increased to the next higher level of cover in the event that they are promoted. The employee is promoted and their insurance cover increases. The insurance cover is provided under the terms of the original arrangement which has not been varied. The employee is provided with benefits under the terms of the original arrangement and the transitional rules can continue to apply to the higher level of cover.