Optional Remuneration Arrangements and employer-provided insurance policies

23 February 2024

The Optional Remuneration Arrangement (OpRA) rules can have a surprising effect on certain employer-provided insurance policies. Are you getting this right?

What is an Optional Remuneration Arrangement?

The OpRA rules apply to benefits provided by employers under either ‘Type A’ or ‘Type B’ optional remuneration arrangements. 

Type A arrangements are those under which the employee gives up the right, or the future right, to receive an amount of earnings in return for a benefit. An example would be a salary sacrifice arrangement.

Under a Type B arrangement, the employee agrees to receive a benefit instead of an amount of earnings. For example, where an employee has a choice between taking a cash car allowance or a company car with Co2 emissions of more than 75g/km.

Where an employee is provided with a benefit in kind under an OpRA, the annual value of the benefit for tax and National Insurance Contributions (NIC) purposes is (broadly) the higher of: 

  • the amount of pay given up; and
  • the taxable value of the benefit under normal benefit in kind rules.

Some benefits are excluded from the OpRA rules, for example, employer contributions to a registered pension scheme. 

So how does this affect insurance policies which cover your employees?

Take employer-provided private medical insurance (PMI) as an example. 

Many employers operate arrangements under which an employee funds all, or part of the cost of PMI provided by the employer. If the employee funds this cost out of their net pay (ie after tax and employee NIC is first deducted) this is not an OpRA as the employee is repaying the cost of the benefit. Provided the amount is repaid in full on or before 6 July following the tax year in question, no benefit in kind arises.

If the PMI is instead funded by the employee through salary sacrifice (Type A OpRA), employees agree to give up part of their salary in exchange for the PMI benefit. The PMI is fully taxable and liable to Class 1A NIC, including the part funded by the employee through salary sacrifice. This is more complicated for the employer. They must consider whether the value of the benefit is the higher of the pay given up, or the value of the benefit, under normal benefit in kind rules. The benefit’s value is then reportable on forms P11D or via the payroll for tax purposes.

If employer provided life insurance is provided under an OpRA, the position is more complex.

Employer-provided life insurance can be considered a non-taxable benefit in kind under Section 307 ITEPA 2003. If an employee chooses to enhance their life insurance (eg to double the amount their next of kin could receive in the event of a claim) and the employee funds the extra cost of the premiums through salary sacrifice, then there would (depending on whether the policy is a registered or excepted group life policy) be a Type A OpRA. The benefit in kind value would be the amount of pay given up by the employee on the basis that the benefit would otherwise be exempt and the ordinary benefit in kind value is nil. By structuring this under salary sacrifice, an otherwise exempt benefit becomes taxable and liable to NIC.

Are group income protection policies also affected by OpRA?

Often an employer purchases group income protection, which provides them with funds to pay employees via the payroll for tax/NIC purposes in the event they are absent from work for an extended period of time due to ill health or disability. No taxable benefit arises on the premium where the employer funds the full cost.

This exemption is essentially overridden where the cover is provided under OpRA. A benefit liable to tax and Class 1A NIC arises if, for example, the employee enhances the cover and funds the additional cost via salary sacrifice.

If an employee funds their cover in part under an OpRA (eg salary sacrifice):

  • there would be a taxable benefit arising on the cover; and
  • any sickness/disability pay would be taxed as earnings.

To avoid this double taxation, in October 2019, HMRC provided guidance to the Association of British Insurers. The guidance stated that salary sacrificed by employees for group income protection cover could be considered as employee contribution towards the policy (and a deduction allowed).

HMRC have since withdrawn that guidance, stating it was incorrect. This is subject to certain transitional rules. These can be summarised as follows:

  • in relation to scheme sick pay payments made to employees or former employees between 15 October 2019 and 31 December 2023 inclusive, HMRC will not pursue a charge to tax on the earnings that relate to the premium funded by the salary foregone in periods starting on or after 6 April 2017 in return for GIP cover; and
  • relevant sick pay payments made on or after 1 January 2024 will be treated as non-taxable to the extent that they are attributed to salary foregone between 15 October 2019 and 31 December 2023 in return for GIP cover.

Further details on this complex guidance can be found at EIM06474HMRC’s guidance on transitional period.

What should I do?

Employers should carefully consider how the OpRA rules can affect the tax and NIC treatment of all benefits made available to employees, including the insurance policies they provide, and which cover their employees.

With mandatory payrolling of benefits on the horizon from April 2026, the position will arguably become more complex. Employers will need to correctly value their employee benefits in real-time and ensure that the benefits are correctly taxed via the payroll.

For more information, or if you would like to discuss this further, please contact Lee Knight, Susan Ball, or your usual RSM contact.