New tax and National Insurance charges will be levied on group income protection (GIP) and excepted group life insurance (EGLP) offered through flexible benefit arrangements run through salary sacrifice, the Government has confirmed.
HMRC has confirmed that both GIP and EGLP will fall in scope for changes to the taxation of salary sacrifice optional remuneration arrangements (OpRAs) which come into force in less than five weeks’ time. Its draft legislation published in December 2016 had made no mention of GIP and EGLP, raising hopes the products had been excluded from the new rules.
The changes mean that from April 2017 employees flexing up GIP cover from a base level through salary sacrifice will be hit with income tax on the value of the benefit. Employers will from April 2017 have to pay National Insurance on the value of the benefit. A saving to the employee in terms of employee NI, will remain however.
The far-reaching changes potentially cover any scenario in which an employee can choose between cash and a benefit. Critics argue the move contradicts other Government initiatives to increase GIP – it is currently seeking industry views about how to increase incentives for GIP across UK employers.
Aviva is warning that limited transitional rules may apply earlier than employers are expecting.
Aviva managing director, group protection Steve Bridger says: “As neither product was mentioned in the original consultation or included in the draft legislation, we were optimistic that GIP and EGLP would not be caught because of the wider value to society that such products can deliver.
“This is unnecessary collateral damage from the proposed changes and our prediction is that hard working families will be discouraged from protecting themselves against the unexpected. It also appears to work against the spirit of the recent ‘Improving Lives’ Government green paper.
“Particularly in the case of GIP, reduced cover will lead to greater reliance on the state at a family’s time of need. Once the tax and employer National Insurance Contribution (NIC) benefits are removed, we think many employers may reconsider how they structure GIP arrangements.
“There is a dual taxation issue on GIP as well, as currently all proceeds from employer funded GIP premiums are subsequently charged to income tax and NIC when benefits are received by the employee” continued Steve Bridger. “We await the Finance Bill on 20 March 2017 with interest to see if this anomaly is addressed.
“We will continue to argue for a different approach and hope that other interested parties will do likewise”.
Grid spokesperson Katharine Moxham says: “We are obviously disappointed that Government has not seen fit to give an exemption for excepted group life or income protection where employees are able to increase their coverage through salary sacrifice. The amounts involved are small and the resulting change will simply add complexity for providers and scheme members. It will add a further burden on businesses which might otherwise have included a facility to allow their employees to build on a basic level of employer-provided cover.
“There has never been a greater need for group protection and we would argue that employers need more help to encourage take-up not less. Grid put forward the case for the provision of these benefits to be encouraged as they reduce the burden on the State, both through reduced expenditure on State Benefits and increased revenue through tax and NI, provide value to employers and employees and are aligned to DWP goals of supporting people back to work.
“The outcome is particularly pertinent for group income protection given that the DWP/DH green paper on work, health and disability has recognised the role that group income protection can play in supporting employers’ health, wellness and attendance programmes. The industry will continue to lobby for some joined up thinking on this.”
How the rules are changing
2016/17 (under pre 6 April 2017 rules)
- Employer A provides core GIP cover of 40% of salary to all employees with the option for employees to flex up their benefit to a maximum of 75% salary.
- Employee A, who earns £30k pa, decides to increase their GIP benefit by 20% (to a total of 60% of salary) at a cost of £180pa funded through a salary sacrifice arrangement.
- This will reduce the employee’s salary from £30k to £29,820pa with income tax and employer national insurance contributions (NIC) payable on the reduced salary.
- This will save the employee approximately £36pa in income tax and £21pa in employee NIC.
- Additionally, the employer will save £24pa on employer NIC
Under new legislation coming in 6th April 2017
- Using the same example as above, the employee will be charged basic rate tax on the value of the benefit, which for GIP will be based on the amount of salary sacrifice to secure the additional cover.
- The £180pa sacrificed will be the taxable value of the benefit in kind and the employer will be liable for employer NIC.
- The employee will be £36pa worse off and the employer £24pa worse off. The employee will still benefit from a small employee NIC saving.