Employers may buy Group Income Protection (GIP) as part of sickness benefits for employees, but HMRC has changed its view of the tax treatment of GIP cover provided via salary sacrifice arrangements.
Under a Group Income Protection (GIP) scheme the employer pays premiums to a provider to ensure the employee’s income (or part of their income) remains payable to them in the event of sickness or disability. Employers will set rules about eligibility and aspects such as the length of the cover and the employees that are covered. Often, the usual Statutory Sick Pay rules will apply and GIP cover is implemented when this entitlement is exhausted.
If the employee becomes eligible for a GIP payment, this is paid to the employee as earnings through the payroll for income tax and national insurance contributions (NIC). Where the premium is paid in full by the employer, there is no declaration of a benefit in kind (BIK).
All of this is turned on its head where the GIP cover is part of an optional remuneration arrangement (OpRA, commonly referred to as salary sacrifice). It could be that the employee chooses to “enhance” the cover that is provided by the employer. For example, maybe they choose to increase the level of salary cover. Where this does happen, an increased premium is payable by the employer, which may be met by sacrificing a portion of their salary.
In such an arrangement, where OpRA/salary sacrifice comes into play:
- The employer premium is increased by the value of the employee’s sacrifice, thereby creating a value declared as a BIK.
- The GIP payment is still processed through the payroll by the employer.
This results in double taxation.
The issue of double taxation was raised by the Association of British Insurers (ABI) on 15 October 2019. At this time, HMRC confirmed (see EIM06470) that GIP, funded in part by an employee sacrificing part of their pay, would be treated as follows:
- The standard premium paid by the employer would remain free from being treated as a BIK but the enhanced value (via salary sacrifice) would be classed as an employee contribution and would NOT result in a benefit value.
- Any resulting GIP payment made to the employee would NOT be treated as income resulting from employment.
In December 2022, HMRC updated EIM06474 to say that the 15 October 2019 interpretation of the OpRA legislation was incorrect. Consequently, its guidance to the ABI was also incorrect. Any enhanced OpRA premium should not be regarded as an employee contribution and, as such, an element of double taxation comes into play where employees enhance their GIP cover by making an OpRA contribution and later receive GIP sickness or disability payments as a result of the GIP membership.
Where employers have relied on HMRC’s previous guidance to the ABI (and in recognition that any GPI sickness and disability payments can occur long after the enhanced premium was made via an OpRA agreement), HMRC has introduced a phasing out of their guidance that allows for transitional periods:
- For sickness and disability payments in the period 15 October 2019 to 31 December 2023, HMRC will accept that, where a GPI scheme allows for enhanced cover from an employee contribution via OpRA, no change will be made to existing practices. This means that the OpRA contribution will still be treated as an employee contribution, the BIK value will be the employer’s contribution only and the payment will not be subject to Income Tax as earnings.
- For sickness and disability payments from 1 January 2024, where a GPI scheme allows for enhanced cover from an employee contribution via OpRA, this employee contribution will not be classed as an employee contribution. Further, any resulting sickness or disability payment will only be regarded 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”.
This means that the OpRA contribution will be treated as an “amount foregone” for benefit purposes. The payment will be non-taxable, however, there is the complication of apportioning it for income tax purposes on a “just or reasonable basis”.
It’s all to do with OpRA and the interaction with employment income and BIK. I don’t see how an employee contribution could create a BIK liability when the contract for provision is with the employer and provider – albeit the employee is adjusting that by paying an increased premium. The taxable consideration is, surely, only when the payment is made to the member. However, this is HMRC’s latest interpretation of the complex OpRA legislation.
The solution is:
- Use the transition period above to change processes at the workplace. An amount treated as a contractual salary sacrifice is an “amount foregone” and, as such, is captured under the OpRA rules.
- Change the GIP contribution to a net pay deduction so that the enhanced premium is still paid to the employer but not via a sacrifice from income before income tax and NIC. EIM06472 confirms that net pay deductions from employees results in any GPI payment being not subject to income tax and points to the HMRC’s Insurance Policyholder Taxation Manual where the interaction with the Income Tax (Trading and Other Income) Act 2005 is explained. Basically, the GIP payment is not taxable to the extent of the employee’s net pay deduction.