Group Risk Development (Grid) has written to chancellor Jeremy Hunt expressing concerns about HM Revenue & Customs “flawed” interpretation of taxation on group income protection (GIP), within the context of an optional remuneration arrangement (OpRA).
The trade body said the reversal of HMRC’s position meant employees in claim faced being double taxed – on their original salary sacrificed and the payment from the insurer.
Grid chairman Paul White and regulatory committee chairwoman Clare Lusted told Jeremy Hunt that HMRC’s latest interpretation of the OpRA legislation as announced on 1 December, had come after more than six years of discussion and exchanges.
“[It] has led to a position where an employee in claim will be double taxed, i.e. taxed on the salary they sacrificed for their GIP cover, and taxed on the benefits they receive if they are unable to work due to sickness or injury,” they said.
The pair write that this situation needs to be “urgently addressed” as double taxation of input and output is “unfair”.
In January, Health & Protection reported on the warning from employee benefits consultancy Broadstone about the severity of the situation.
It highlighted that while guidance issued in October 2019 removed the risk of double taxation on income benefits received from GIP funded by employee salary sacrifice under Optional Remuneration Arrangements (OpRA), the December update from HMRC overturned that previous guidance, saying it was “incorrect” and that such benefits payments were taxable.
The new position was included in Insurance Policyholder Taxation Manual – IPTM6120.
Grid’s interpretation of the current rules is that the salary sacrifice entered into by an employee to enable a higher level of sick pay benefit from their employer in the event of incapacity is not a taxable benefit, and is therefore out of scope for OpRA taxation – meaning employees should only be taxed once on the payment of proceeds from the employer to the employee.
Consequently Grid is asking for HMRC to adopt this position and state that no change of legislation is necessary.
Grid said it believed HMRC’s current position to be incongruent with the government’s aim to encourage more people back into the workplace and to reduce the costs associated with having a significant proportion of the workforce economically inactive.
The body cited Swiss Re Group Watch 2022 statistics which it said showed the uncertainty of the situation had already created a reduction in the number of employers offering flexible top-up GIP options.
Grid further warned that with fewer comprehensive GIP policies in place, fewer employees will be supported financially while they are unable to work and fewer people will receive the inherent preventative and rehabilitation support that is embedded into these policies.
This, it warned, results in lower income tax revenues for HMRC and an increased welfare bill.
Raise employer awareness
The body also called on the protection industry needs to raise employer awareness of this issue – highlighting the need for employee benefits consultants, advisers and insurers to raise this issue with employers.
Employers currently have until the end of 2023 to review the way they provide their GIP salary sacrifice arrangements and to communicate any necessary changes to employees.
Currently, GIP claim payments under salary sacrifice schemes up to 1 January 2024 can be made tax-free proportionate to the part of the premium treated as a benefit in kind, after which time, the OpRA rules will apply.
Paul White, chairman of Grid, said: “At a time when government is looking at the insurance industry for ways to encourage individuals to take increased personal responsibility through adequate insurance, HMRC’s intransigence is pushing employees away from GIP schemes and into a position of having no or inadequate income protection cover should they fall ill.
“As a sector, we know that work is good for employee health.
“We specialise in helping employers get their staff back to work after an illness or injury and we know that early intervention and retaining the link with the employer is vital.
“If employers are not incentivised to invest in solutions, sick employees languish at home waiting for costly state support while their condition gets worse, and their former employer has to seek a replacement, harming productivity and increasing costs.
“We urge the chancellor of the exchequer to direct HMRC to review its policy on GIP contributions via salary sacrifice and to adopt the correct interpretation of the legislation, especially in the current economic climate where protection of this nature offers good value and a lifeline to many employees in their hour of need.”