HMRC have recently published revised guidance on the treatment of Group Income Protection payments. In reversing their previous advice, they now confirm that there will be double taxation of employees where policies were taken out through salary sacrifice. 

In October 2019, HMRC told the Association of British Insurers (ABI) that any salary sacrificed by employees would count as employee contributions when assessing the Benefit In Kind (BIK) arising on the provision of Group Income Protection (GIP) policies through employment.

The previous position, as told to the ABI, was that GIP policies:

  • Are not a BIK where the employer bears the full cost of providing the policies.
  • Under the Optional Remuneration Arrangements (OPRA), a BIK does arise where the employee contributes to the provision through salary sacrifice.
  • Any sick or disability income received by the employee resulting from the policy is taxable as employment income unless the employee contributes directly to the policy.
  • As indirect contributions via salary sacrifice would mean taxation of the policy as a BIK and there would be taxation of any income received, HMRC in practice did not tax the sick or disability pay in order to avoid such double taxation.

HMRC have now confirmed that this advice was incorrect and new guidance has been published. Instead, there will be double taxation where an employee contributes indirectly to a policy via salary sacrifice and receives a payment from the policy in relation to sickness or disability.

In recognition of the fact that HMRC practice will have been relied upon by employers and employees, a transitional period will be in place from the date of the original ABI speech (19 October 2019) and 31 December 2023. HMRC will honour their old practices for:

  • Relevant policy payments made to employees (or ex-employees) until 31 December 2023, where it can be shown that they relate to salary sacrifices made on or after 6 April 2017.
  • Relevant policy payments made to employees on or after 1 January 2024, where it can be shown that they relate to salary sacrifices made between 19 October 2019 and 31 December 2023.
  • The same will apply for repayment claims made in relation to GIP cover between 15 October 2019 and 1 December 2022.

Useful guides on this topic

Salary sacrifice & optional remuneration schemes (OPRA)
What is a salary sacrifice or optional remuneration arrangement? How is it taxed?

Employee benefits
What sort of benefits and incentives can an employer provide to their directors and employees? Do benefits form part of an employment contract?

Tax-free benefits and perks
What are the key tax-free benefits or 'perks' that can be used to incentivise your staff? How should you structure them?

External link

HMRC Manual - Employment Income: sick pay and injury payments: provision through a salary sacrifice arrangement 

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