Group Income Protection policies and OpRA
09 January 2023
Occasionally HM Revenue and Customs (HMRC) gets something wrong and they are required to correct guidance and advice to stakeholders. In this case, it has corrected guidance pertaining to the tax treatment of sick pay funded by salary sacrifice arrangements into a Group Income Protection (GIP) policy.
Some employers may provide funds for sick pay directly, or through an insurance policy (GIP). Whichever method is used, the sums paid to employees are taxable as earnings within section 62 or section 221 of Income Tax (Earnings and Pensions) Act (ITEPA) 2003.
The guidance (IPTM6120) now correctly states:
“Amounts funded by way of a salary sacrifice under OpRA by the employee do not qualify as an employee contribution to premiums. The employee is no longer entitled to the salary foregone so while the employer may use the salary foregone to fund the scheme this would be an employer contribution, not an employee contribution – see EIM06470 onwards.”
Therefore, payment made to an employee from a GIP policy would be seen as employer funded and as such will be taxable in full under section 221 ITEPA 2003.
However, as previous guidance was incorrect, HMRC recognises that this will have been relied on by employers and as such has set up a transitional approach to enforcement. They will not seek to revisit cases where the guidance was relied on. Examples given in the EIM are:
- where sick pay payments were made to employees or former employees without deduction of tax between 15 October 2019 and 31 December 2023 inclusive to the extent that they are (or are derived from) amounts that can be or have been attributed on any just and reasonable basis to salary foregone by employees in periods starting on or after 6 April 2017
- where repayment claims (including overpayment relief claims and PAYE adjustments) were made between 15 October 2019 and 1 December 2022 inclusive to the extent that these claims related to sick pay payments made to employees or former employees and are, or are derived from, amounts that can be attributed on any just or reasonable basis to salary foregone by employees in periods starting on or after 6 April 2017
- sick pay payments made on or after 1 January 2024 will be accepted as non-taxable to the extent that they are made or are derived from amounts that can be attributed on any just or reasonable basis to salary foregone by employees between 15 October 2019 and 31 December 2023.
An alternative arrangement would be if a payment is made to such a scheme using net pay, there would be different rules:
“If the employee makes contributions out of their taxed income and separate from any salary sacrifice arrangement these contributions will be counted as ‘B’ ‘Employee Contributions’ in the calculation at EIM06430 to the extent that they have funded sick pay subsequently received.”
Information provided in this news article may be subject to change. Please make note of the date of publication to ensure that you are viewing up to date information.