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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