What Is OpRA (Optional Remuneration Arrangement)
Sometimes better known as salary sacrifice, these are arrangements under which an employee agrees to be provided with a benefit in kind rather than an amount of earnings (for example an employee gives up an amount of their salary in exchange for a car). As the amount given up is deducted from salary before tax and National Insurance (NI) are applied, the employee could enjoy tax and NI savings.
However, although arrangements such as these have been about for many years, legislation was introduced in 2017 that limited the tax and National Insurance savings. The new legislation meant that where a benefit is chosen instead of some form of cash payment, the reportable taxable value (cash equivalent) of the benefit is the greater of the amount of cash given up and the taxable value under the normal benefit in kind rules. This means that an employee always pays tax based on the correct amount but can still see NI savings.
For example, if an employee gives up £500 of salary in exchange for a benefit that only has a cash equivalent of £200, the employee would be taxed on the higher value (£500), ensuring there is no taxable benefit in giving up the cash. However, the employee would not be paying NI on the full £500, which they would’ve been if paid as salary - so there are still savings to be made, especially when low emissions cars are involved.
Please note that OpRA, or Salary Sacrifice, is NOT the same as a benefit being payrolled, that is related to taking the tax for a benefit at source rather than via a P11D. A benefit could be treated for OpRA AND also be payrolled, these are two separate processes or options in the software.
Salary Sacrifice and Low Emission Cars
Although the above rules are fairly clear (an employee pays tax on the higher of the amount forgone and the cash equivalent), there is currently an exception on cars where the CO2 figure is 75 g/km or less. This exemption was put in place to encourage people to adopt low emission cars and means that the employee would only pay tax on the cash equivalent of the car, not the amount of cash given up.
As an example, if an employee gave up £6,000 a year in return for a low emissions car, and the cash equivalent of that car was only £1,000 a year, then they would only pay tax on the £1,000. This offers a significant tax saving as well as the saving on NI, hence promoting the use of low emissions vehicle.
Working with Salary Sacrifice or OpRA in the P11D Organiser
The P11D Organiser will perform all the necessary calculations and apply the appropriate legislation to any benefit provided under a salary sacrifice scheme. You simply have to tell the software about the benefit provided and the annual amount of salary given up and it will do the rest.
By default, the areas that allow the entry of OpRA information into the software are hidden, and therefore need to be turned on. This can be accomplished by following these steps:
Firstly, click the Benefits Profile tool on the left toolbar or the bottom of the employer screen.
Then select the benefit description to which you wish to apply OpRA, and click the edit button at the bottom.
Now locate the option for Optional Remuneration Arrangement section and set the dropdown to Yes.
The system will confirm that you want this applied – hit the Yes button to confirm.
If you now navigate to any employee and view the benefit description we have just adjusted, you will find the Optional Remuneration Arrangement controls visible at the bottom of the screen. This allows you to turn OpRA on or off for this employee, and also to enter the annual amount foregone manually.
Please note that you ALWAYS enter the annual amount foregone, HMRC make the comparison to the cash equivalent at the annual level and then prorate accordingly if necessary.
Salary Sacrifice/OpRA Examples
In this first example we have a car with a CO2 of 96 g/km, which is generating a cash equivalent of £4,200. Click edit, set OpRA to yes, and enter the annual amount of cash forgone of £5,000 and click save. You will now see that the cash equivalent to be reported has changed to £5,000 as that figure is higher than the cash equivalent.
This can be audited by clicking the Edit button, and then hitting the Show Calculations button at the bottom, and you’ll see the comparison at the top.
In the second example, we have a car with a CO2 of on 45 g/km leading to a cash equivalent of just £1,200. We’ll turn on OpRA again at the bottom, and enter the annual cash foregone (again £5,000), but you’ll see in this case the cash equivalent has not changed. This is because the car has low emissions and therefore the comparison to the amount foregone is not needed.
This can again be audited by clicking Edit followed by the Show Calculations button and viewing the comment at the top of the screen.
Importing Cash Forgone Figures
The usual way to get cash forgone values into the system is via an import at the same time as the car allocation details. In the import file you would add the ANNUAL cash equivalent to each allocation. This means that if an employee gave up £6,000 of salary but had three different cars during the year, the £6,000 would be imported against every allocation.
Changes to Optional Remuneration Arrangements rules
Finance (No 3) Bill 2018-19 received Royal Assent, and addressed two anomalies in the April 2017 Optional Remuneration Arrangements (OpRA) rules, by introducing legislation to:
- Ensure that when a taxable car or van is provided through OpRA, the amount foregone, which is taken into account in working out the taxable benefit in kind, includes any amount foregone in connection with associated costs (such as insurance and servicing)
- Adjust the value of any capital contribution towards a taxable car when the car is made available for only part of the tax year.
The new rules applied from 6 April 2019 and guidance will be updated to reflect these changes.