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Optional Remuneration Arrangements

Optional Remuneration Arrangements

The Finance Bill introduces legislation designed to remove the Income Tax benefits of Optional Remuneration Arrangements (OpRA). However, some question marks remain.

Colin Ben-Nathan


KPMG in the UK


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Who should read this? 

All employers who provide Benefits in Kind (BiKs) or car allowances to employees, particularly those who operate salary sacrifice or flexible benefit arrangements. These changes will be of particular interest to those who work within payroll, tax, finance, HR and flexible benefit programme delivery.

All employees whose remuneration packages include salary sacrifice or flexible benefit arrangements.

Summary of proposal

The proposed changes are contained in clause 8 and schedule 2 of the Finance Bill and are designed to remove the Income Tax advantages that currently arise when certain non-cash benefits are provided as part of a salary sacrifice or flexible benefit arrangement.

Broadly speaking, the Finance Bill provisions do this by treating the taxable value of BiKs provided as part of an OpRA as the higher of:

  • The cash equivalent of the BiK (as prescribed by the current legislation); or,
  • The amount of salary forgone less any amounts made good by the employee.

It is important to stress that the changes affect more than traditional salary sacrifice – the new rules define an OpRA to be arrangements where:

  • “…in return for the benefit, the employee gives up the right (or a future right) to receive an amount of earnings…”; or,
  • “…the employee agrees to be provided with benefits rather than an amount of earnings…”

Broadly speaking, where an employee has an option to receive cash or benefits, the new rules may be in point.

Benefits which are not provided as part of an OpRA will not be affected by the changes. 

And the following BiKs are specifically excluded from the scope of the new rules and so will not be affected even if provided via an OpRA:

  • Pension saving under registered and qualifying overseas plans (including related pension advice);
  • Tax exempt childcare (including qualifying nursery provision and childcare vouchers);
  • Cycle-to-Work schemes;
  • Counselling and other outplacement services;
  • Retraining costs;
  • Purchase of annual leave; and,
  • Ultra-low emission company cars (with CO2 emissions less than or equal to 75 g/kms). 

Key changes from the draft legislation

The publication of the Finance Bill and associated draft guidance has clarified that:

  • Tax exempt benefits (e.g. car parking or company mobile phones) provided via an OpRA will always have a taxable value equal to the amount of salary foregone, less any amounts made good by the employee. Previously it was not clear how these tax exempt benefits would be valued when provided via an OpRA. 
  • Where a company car is provided via an OpRA (and this includes arrangements where the employee can opt for either a cash payment or a car), employee payments for both private use and capital contributions will continue to reduce the value of the taxable benefit even if calculated under the new rules. 
  • On a more general note, any amounts made good by an employee (subject to the new deadline of 6 July after the relevant tax year) will continue to reduce the taxable value of BiKs calculated under the new rules.
  • Where a benefit is part provided via an OpRA, the benefit is to be apportioned on a just and reasonable basis such that the portion attributable to the OpRA is taxed in accordance with the new rules while the balance is taxed under the “normal” benefit rules.
  • Authorised Mileage Allowance Payments (AMAPs) may be paid to private car drivers at up to 45p per mile tax free for the first 10,000 miles, and 25p thereafter (and at up to 45p per mile without a mileage limit for NIC purposes), where an employee undertakes business mileage. HMRC have confirmed that where AMAPs are utilised as part of an OpRA - that is, where an individual agrees to give up pay in return for receiving an additional tax/NIC free mileage expense reimbursement – the additional AMAP amounts will be subject to tax and employers NIC as though they were cash.

Notwithstanding that the Finance Bill has clarified several areas, the following issues still require some clarification:

  • We understand that the inclusion in the draft Finance Bill of ‘death or retirement’ benefits under Section 307 (of the Income Tax (Earnings and Pensions) Act 2003) as an excluded benefit was an error. This has now been rectified in the Finance Bill. As such, Life Assurance provided via an OpRA is now within the scope of the new rules. However, it was confirmed by HMRC verbally at a round table earlier in the year that life assurance provided as part of a registered pension scheme would continue to be excluded from the new OpRA rules. We await further clarification as to the circumstances in which HMRC consider the life assurance to be part and parcel of a pension scheme. However, it is to be expected that employers will need to review the detail of their scheme documentation to ascertain whether they meet the relevant criteria, once known.
  • As we set out here, the draft Finance Bill provisions (published in December 2016, following the Autumn Statement) were, in our opinion, not sufficient to bring Group Income Protection within the scope of the new OpRA rules in cases where the beneficiary of the policy is the employer. Additional provisions have now been introduced at s.202 ITEPA 2003, ensuring that the OpRA rules will apply to benefits associated with payments made where an employee is absent due to sickness or disability and which are then taxed under s.221.  
  • Notwithstanding our comments above re AMAPs, where employers make such payments as part of an employer mandated remuneration policy there remains uncertainty as to whether such circumstances should be considered as an employee being presented with an OpRA. For some employers who operate arrangements such as Employee Car Ownership Plans (ECOPs), in the absence of further guidance, this will, unfortunately, present continuing uncertainty. Given the short timescale before this legislation applies, it may be prudent to suspend new entrants to such schemes from 6 April 2017 until such time as further clarification has been received. The status of each arrangement as an OpRA, or not, will rest on the merits of each individual scheme. Therefore a review of employer policy, employee contract and any communication wording would be required in order to understand the likely position, based on the legislation as drafted.


The changes come into effect from 6 April 2017. 

They are, however, subject to the following ‘grandfathering’ provisions (but see below regarding ‘variations’):

  • Living accommodation, school fees, company cars/vans and fuel provided via an OpRA entered into pre-6 April 2017 will not be impacted by the new rules until 6 April 2021.
  • Other benefits provided via an OpRA entered into pre-6 April 2017 will not be impacted by the new rules until 6 April 2018.

Employers and employees should exercise extreme care when dealing with grandfathered OpRA as any “variation” to the terms may lead to the grandfathering status being lost from the date of the variation and the benefit coming within the scope of the new rules from that date. Only variations required due to the following will not lead to grandfathering status being lost:

  • Accidental damage;
  • Reasons beyond the control of the parties to the OpRA;
  • Reasons connected with sick pay, statutory maternity/paternity/shared parental pay; and,
  • Statutory adoption pay.

Likewise employers should be aware that a renewal of a grandfathered OpRA will not itself be grandfathered but will come within the scope of the new rules from the date of the renewal. This includes automatic renewals. 

Our view 

One of our primary concerns is that many employers will still not appreciate that the proposed OpRA legislation is wider than salary sacrifice and also impacts any arrangements where the employee can choose between cash and a benefit (e.g. company cars). There is a risk that many will continue to think that, as they do not offer traditional salary sacrifice, no further action is required by them.  

In terms of action, the grandfathering provisions are clear that an OpRA, or a variation to an OpRA, entered into pre-6 April 2017 will be subject to the grandfathering provisions discussed above. Employers and employees therefore have a very short window in which to review and amend their various arrangements – of particular importance are arrangements involving company cars and accommodation given the extended grandfathering period.

We await further clarification regarding Life Assurance arrangements. If they are provided as “part” of a pension scheme, it is worthwhile reviewing the relevant documentation now to confirm that this is in fact the case. It is not unusual for these to be legally separate and distinct, notwithstanding that they appear to be bundled into a single offering.

Those employers payrolling BiKs provided via an OpRA agreed post-5 April 2017 will need to urgently update their systems and procedures to ensure the correct amounts are captured for payroll purposes.

Employers that do not payroll BiKs will need to update their systems and procedures dealing with the Form P11D process to ensure the correct amounts are captured. 

The corresponding amounts of Class 1A NIC will also need to be collected following the end of the 2017/18 tax year and the Form P11D(b) completed accordingly.

A final key area for employers to consider is communication i.e. how the changes are communicated to their staff and indeed what the future of their employee reward proposition looks like as a whole. More can be found on this topic here on KPMG Employers’ Club (registration required).  


Colin Ben-Nathan

+44(0)7311 3363

Ian Goodwin

+44 (0) 113 231 3227 

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