HMRC’s guidance around the impacts of its corrected advice on the treatment of Group Income Protection (GIP) policies and salary sacrifice schemes, and the interaction with NIC credits for the State Pension.

On 15 October 2019 HMRC provided guidance to the Association of British Insurers (ABI) on how the OpRA legislation (please see below) affected the taxation of Group Income Protection (GIP) policies taken out by employers to fund payments of sick pay. This guidance stated that salary sacrificed by employees could be taken into account as employee contributions for the purpose of determining the amount taxable under either section 221 ITEPA 2003 or chapter 7 of part 5 ITTOIA 2005.

This guidance was incorrect. In August 2022, HMRC updated its guidance, and says that EIM06474 shows the correct taxation position and agreed transitional arrangements if this incorrect advice had been relied on.

It says:

“The correct position is now reflected in the previous pages [to EIM06474] and at IPTM6120. These amounts of salary foregone will not be employee contributions for either provision.

The guidance was provided as a general view on the tax treatment of sick pay funded via salary sacrifice arrangements. HMRC says that it therefore recognises that this guidance may have been relied on by:

• employees entering into or deciding to remain in sick pay arrangements via salary sacrifice after 15 October 2019;
• payers and payees considering the tax treatment of sick pay payments made after 15 October 2019 where they derived from salary sacrifice arrangements.

HMRC will therefore not seek to revisit the tax treatment where customers [taxpayers] have relied on the previous guidance in the following cases:

• 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.

HMRC will assume that customers [taxpayers] have relied on the 15 October 2019 advice unless details of the claim indicate there was no such reliance.

In all other cases, the guidance provided in the preceding pages [to EIM06474] and relevant pages in IPTM6200 onwards will apply to the taxation of sick pay provided under OpRA.”

HMRC’s guidance in its latest Employer Bulletin, says that, in some cases, there may be an impact on an individual’s entitlement to contributory benefits including State Pension if they or their employer relied on the incorrect advice given in October 2019. This is because they may have received, or will receive under the transitional arrangements, income from a GIP policy not fully subjected to National Insurance contributions (NICs), as it would have been under the correct taxation position.

Whether there is an impact will depend on other income or NIC credits an individual has received in the year. HMRC has considered this issue and concluded that due to this, any such impact should be looked at on a case by case basis.

HMRC is therefore urging individuals to check their personal tax account or their NICs record for years where they have benefited from GIP policies to see whether there is a shortfall in their NICs record. If there is they should contact HMRC if:

• they made contributions to a GIP policy by way of salary sacrifice;
• they received sick pay from their employer under that GIP policy and that sick pay was not fully subjected to NICs.

HMRC says that it will look at each case individually at that point and, if required, rectify the shortfall to mitigate impact on any contributory benefit entitlement.

The OpRA legislation

Salary sacrifice is an agreement between an employer and employee to change the terms of an employment contract and reduce the employee’s entitlement to cash pay in exchange for some form of non-cash benefit in kind. The effect of this, depending on the benefit in kind, is often to reduce the amount of income tax, employee and employer NICs due on the employee’s remuneration. Making efficient pension contributions is one of many reasons to sacrifice salary.

In its 2016 Budget report, the Government announced it would limit the range of benefits that attract income tax and NICs advantages when they are provided as part of salary sacrifice schemes. As a result, from 6 April 2017 certain benefits provided under salary sacrifice arrangements (described in the legislation as ‘optional remuneration arrangements’ – OpRAs), no longer benefit from the income tax and NICs advantages previously available under salary sacrifice arrangements – please see EIM42750. (This does not however affect all benefits. For example, employer pension contributions are not affected. So, salary sacrifice can remain as tax efficient as ever for employer pension contributions.)

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As reported in our earlier bulletin, the Law Commission restarted its wills project earlier this year. On 5 October, it launched its anticipated consultation paper.

This “Supplementary consultation” focuses on two main issues which have recently become very topical.

The first is whether electronic wills should be allowed in light of technological and societal developments. The second is whether the rule that marriage or a civil partnership automatically revokes a will should be retained in the light of concerns about predatory marriage and vulnerable people.

The Covid pandemic highlighted the problems with execution of wills and, in the UK, provisions were introduced for virtual witnessing of paper wills. However, many countries went farther and introduced permanent reforms to enable electronic wills.

The Law Commission is now seeking views on whether a new Wills Act should permit electronic wills, either immediately or by allowing for them to be introduced later. The new legislation could go further than the temporary measures brought in during the pandemic. Fully electronic wills could be created digitally, using electronic signatures, and could be stored electronically with no paper version needed. However, any legal provision for electronic wills would need to ensure that they are as secure as paper wills. The key question, therefore, is how electronic wills can be made legally valid and how bespoke requirements for these wills should be introduced.

The issue of predatory marriages was recently highlighted in a Channel 5 documentary about “Inheritance Wars”. In one episode, a 92-year-old widow with severe dementia was befriended by a man. She was apparently unable to make even simple decisions but married the man a few months before her death, with her family having no notice of this. Although Registrars have responsibility for judgment of mental capacity on the day of marriage, they often lack training and/or awareness of capacity issues.

As mentioned above, under English law, a marriage or civil partnership automatically revokes an existing will so, as a result of marriage in this case, the lady’s children lost their inheritance and indeed were not even able to bury their mother. This case resulted in the daughter of the lady starting a campaign for a change in the law, resulting in a Private Member’s Bill from her local MP. There are apparently numerous similar examples.

In this regard, the new consultation seeks to establish how often this form of financial abuse takes place and considers whether wills should continue to be automatically revoked by marriage or civil partnership.

The Commission asks the following main questions (with a lot of supplementary questions on the details of the proposals as well as any evidence of the need for change):

• Should electronic wills be legally valid? If yes, how, and when should bespoke requirements for these wills be introduced?
• Should marriage or civil partnership automatically revoke a will, given the risk of predatory marriage?

Responses to the consultations should be submitted by 8 December 2023.

The consultation document is available here and the response can be made online here.

While this particular consultation focuses on the two issues mentioned above, the Law Commission’s Wills project covers all of the following:

• The formal and substantial validity of a will, including:
  • testamentary capacity;
  • the formalities for a valid will (currently governed by section 9 of the Wills Act 1837), including an examination of the issue of a will being made electronically;
  • the interpretation and rectification of a will;
  • the possibility of a power to dispense with the formalities otherwise necessary for a will to be valid;
  • the age at which a will can validly be made; and
  • knowledge and approval and undue influence in the testamentary context.
• Statutory wills.
• Mutual wills.
• Ademption of testamentary gifts (where the property no longer exists or has changed in substance) and revocation of wills.
• The registration of wills.
• Donationes mortis causa.
• The comparative and international context of the law of wills.
• Other areas of the law of wills as set out in the Wills Act 1837.

Given that wills in England and Wales are governed by the Wills Act 1837 (that’s almost two hundred years old!) and case law, it is clearly high time for reform. Clearly, the subject is complex and, unfortunately, the Law Commission’s Wills Project, ongoing since 2016, was interrupted for two years due to Covid. Let’s hope, now that things are moving again, it won’t be too long before we see reform. Before that happens, though, there will probably be several more Supplementary consultations.

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A press release from the Treasury at the start of this week was headlined ‘Chancellor announces major increase to National Living Wage [NLW]’. The release’s timing probably had more to do with where the Chancellor was – at the Conservative Party conference in Manchester – than its newsworthiness. If there is no scope for cutting taxes, then announcing wages increases is not a bad substitute.  

The Low Pay Commission (LPC), whose job it is to set the NLW and the National Minimum Wage (NMW), issued a consultation back in March 2023 which proposed an NLW rate from next April of between £10.90 and £11.43  an hour with a central estimate of £11.16. That would represent a 7.1% rise on the current rate of £10.42. The LPC’s consultation closed in early June and on Monday Jeremy Hunt said the minimum figure would be at £11.00 an hour.   

The forthcoming NLW decision has added significance because in 2019 the government set a target that the NLW should equal two thirds of median pay by 2024/25. As the press release also noted, April 2024 was also that time at which the NLW minimum age would be reduced from the current 23 to 21. At present the NMW for 21–22-year-olds is £10.18. 

The precise figures for 2024/25 are likely to emerge in the Autumn Statement once the LPC crunches the latest pay data to arrive at its final recommendation. The most recent annual rate of average weekly earnings growth (including bonuses) was 8.5% for the May-July period. When the LPC issued its consultation six months ago, the corresponding figure (for November 2022 – January 2023) was 5.7% (6.5% excluding bonuses). 

If the settled figure is £11.00 an hour – which looks low, given the above – then it will mean that by April 2024 the NLW will have risen by 52.8% since its introduction in April 2016. Assuming inflation will be around 4% by April 2024, the corresponding increase of the CPI over the same period will be about 34%. Take a slowing earnings growth to April 2024 of 5% and average earnings will have grown by about 38%.  

Comment

The NLW increase will affect over two million employees (and their employers). One point the Chancellor’s press release failed to explain was the inflationary impact of countenancing pay increases of at least 5.5%. The Bank of England would not consider that a level compatible with 2% inflation.

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