Confusion over excepted life and GIP tax status

TAX copper alphabetThe position of excepted group life policies (EGLP) and group income protection schemes have been thrown into question by a lack of clarity in the Finance Bill released last week.

Experts say the impact of changes to the tax rules on salary sacrifice, due to take effect from April 2017, remains unclear, with fears growing that GIP benefits could be hit by new tax charges while EGLPs, which appear to be excluded under the Bill as drafted, may be brought within scope.

Providers had called for EGLPs and GIP to be ring fenced and afforded the same treatment as employer pension contributions, which are excluded from the new salary sacrifice rules.

Experts fear that if EGLP premiums funded through a salary sacrifice arrangement are to be classed as a benefit in kind then this would create a significant disconnect between death in service provision under an EGLP and death in service provision under a registered pension scheme. Employees could therefore be disadvantaged based on which product their employer offers says Aviva managing director of group protection Steve Bridger.

Group income protection is already subject to tax and employer National Insurance contributions when a claim is made and the proceeds passed on to the employee. Therefore if premiums funded through a salary sacrifice arrangement are to be classed as a benefit in kind then this is likely to result in a form of double taxation, assuming consequential amendments are made to other areas of existing legislation.

HMRC is understood to have confirmed that the exclusion of EGLPs was a drafting error, and it will be brought within scope of the proposed changes.

Bridger says: “The draft Finance Bill raises many questions.  In its current form it appears that EGLPs will be protected from the April 2017 changes but this was not the policy intention, so we expect this to change in subsequent drafts.

“As for group income protection, I think it’s a moot point – salary sacrifice funded GIP premiums are not currently a taxable benefit in kind and unlike EGLPs do not rely on an exemption. Accordingly you could argue that there is no change to the current rules based on the first draft of the Finance Bill, but the future position is far from clear.  As a business, we strive to defy uncertainty for our customers and we will do all we can to deliver certainty as soon as possible.”

Canada Life Group Insurance marketing director Paul Avis says: “We must bear in mind that most group risk schemes are not on a salary sacrifice basis and are unaffected. This is however a headache for many flexible benefits schemes.

 “Canada Life is particularly concerned about GIP. With the DWP Green paper suggesting that GIP is an important component for employers to consider when looking to retain employees with disability, it is a pity that like other health related benefits it was not exempt from the consultation. As an industry we should have probed what the criteria for exemption was as soon as the consultation came out but when we did it was too late to challenge that decision and this has resulted in a clear disconnect between the DWP agenda to retain and support people with disabilities and the need to raise tax revenues. GIP specifically is a much more complex product as individual premium payments mean benefits, in theory, are tax free and fully offset against Universal Credit whilst group benefits are paid subject to tax and NIC and are therefore only partially offset against Universal Credit. I can see that this decision needs a lot of good thought to provide clarity to both advisers and employers.

“Schemes that have adopted excepted group life, for both employees and partners’ lives are on the surface less complex but thought is needed around the P11d and employer’s NI impact where salary sacrifice has been used previously. Registered schemes are exempt due to the pension exemption but for excepted policies advisers need to be thinking now about what to advise their clients. For example does the lack of a cash alternative reduce the impact of the consultation? Will employers need to be running one tax regime for existing salary sacrifice members that have had no changes and a second one for new employees, those who have made changes or new schemes from April 2017? So there is still a lot for insurers and advisers to work through before we can come up with the best working model due to this change.”