OpRA - benefits transition period closing
Recap
Optional remuneration arrangements (OpRAs) were introduced on 6 April 2017. This was in response to the huge growth in salary sacrifice as a way of offering benefits in kind which had led to a reduction in NI contributions. The lever that HMRC had at its disposal was that once an employer had agreed with an employee the split between cash and benefits in kind, that choice dictated the tax treatment. In order to introduce OpRAs HMRC defined two different types of arrangement: Type A where the employee gives up cash in exchange for a non-cash benefit such as enhanced employer pension contributions or childcare vouchers, or Type B where the employee chooses a non-cash benefit and in so doing gives up a cash allowance that they would have been entitled to such as a car or housing allowance.
Benefit valuation
Where Type A or Type B arrangements are in place there is a different way of valuing the benefit in kind for tax purposes. Contracts that were entered into prior to 6 April 2017 were subject to one of two transitional periods. Apart from arrangements in respect of company cars with CO2 emissions in excess of 75g/km and school fees, the transitional period ended on 5 April 2018. For cars and school fees the transitional period ends on 5 April 2021 unless the employee has changed their car, or the child has moved to a new school in the intervening four years, in which case the transitional period ends immediately.
Tax hike?
The new valuation for Types A and B works by substituting a modified cash equivalent for the normal valuation of a non-cash benefit. It inserts an extra step in the P11D calculation, requiring consideration of whether the cash given up (known as “salary foregone”) is higher than the normal P11D valuation.
Example. An employee chose a car over a car allowance of £500 per month in April 2017. The agreement was signed on 30 March 2017. The car cost £22,000 and has emissions of 22%. For tax years 2017-2020 the P11D value was calculated based on list price and emissions only, but for 2021/22, things are different.
Value 1. Modified cash equivalent £22,000 x 22% = £4,840 v Value 2. Salary foregone £500 x 12 = £6,000. So Value 2 is higher and would be reportable on the P11D . The £6,000 will only be reduced if the employee makes any contribution for private use out of net pay. As well as the additional tax payable by the employee, the Class 1A employers’ NI increases from £667.92 to £828.
Pro advice. If you find that Value 2 is higher you can use Worksheet 2B to help you calculate the P11D value (see Follow up ).
Pro advice. Where possible it may be worth removing the choice of a benefit or cash and only offering the benefit in kind.
School fees
Where a teacher receives subsidised private school fees as a non-cash benefit, the historic P11D value will have only been the marginal additional cost to the employer, which will usually be about 15% of the commercial fees. However, the salary forgone could be substantially higher and therefore becomes the new P11D figure .
Worksheet 2B
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