""HMRC’s intransigence is pushing employees away from GIP [...] into a position of having no or inadequate income protection""
GRiD has written to the current Chancellor Jeremy Hunt to express concern over what it calls HMRC’s ‘flawed interpretation’ of the rules when GIP is provided in the context of an optional remuneration arrangement (OpRA), often referred to as ‘salary sacrifice’.
Double taxation ‘unfair’
The most recent interpretation of the OpRA legislation by HMRC, published in December 2022, means that an employee claiming on a GIP policy will be taxed twice – once on the salary sacrificed to pay for the cover, and then on any benefits they receive when the policy pays out.
Paul White, chair of GRiD, and Clare Lusted, GRiD’s Regulatory Committee chair, asked that the situation be ‘urgently addressed’ as double taxation of input and output is unfair – noting that HMRC had previously treated the tax on this type of policy differently. In 2019, it agreed that proceeds could be paid tax-free proportionate to the part of the premium treated as a benefit in kind.
Other ways of offering GIP (where an employee contributes from their post-tax pay, or where the scheme is entirely funded by an employer) are not taxed twice.
What is group income protection?
Group income protection offers support for those unable to work long-term because of sickness or injury, paying a proportion of their income for either a set period of time (such as five years) or until state pension age. It also includes preventative support to help people stay in work, reduce work absences, and support getting back into work after illness or injury.
It is also flexible – depending on the level of cover, employees can make additional contributions or a flexible top-up to adjust their plan to meet their needs at different ages or life stages.
‘No change of legislation is necessary’ – but awareness is needed
The body also argues that the uncertainty created by HMRC’s changing position has caused a drop in the number of employers offering flexible ‘top-up’ GIP options and that it would discourage other employers from offering this type of cover. This would, GRiD states, ultimately shift responsibility for supporting people who were unable to work from the private sector back onto the state – with higher welfare costs for people who weren’t able to work long-term due to being ill or injured.
GRiD argues that the salary sacrifice 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 – meaning it is out of scope for OpRA taxation, and that employees should only be taxed once, on the payment of proceeds from the employer to the employee.
It is asking for HMRC to adopt this position, saying that no change of legislation is necessary to do so.
Currently, employers have until the end of 2023 to review their salary sacrifice arrangements for GIP and tell employees about any changes, with the new OpRA rules applying to any claim payments made after 1st January 2024. GRiD urges advisers – along with insurers and employee benefit consultants – to raise this issue with employers well in advance of this deadline.
Paul White, chair, 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.”
