Group Income Protection – recent changes to HMRC’s practice
Certain sick or disability pay received under GIP plans will now be taxable – here’s what employers need to know.
Certain sick or disability pay received under GIP plans will now be taxable
Group Income Protection (GIP) arrangements, which provide an income for employees who are absent from work for extended periods due to ill health, are a key part of many employers’ total reward packages. Employers often provide a level of core cover, with employees able to sacrifice salary under Optional Remuneration Arrangements (OpRA) to increase personal cover on a flexible basis. Where GIP is provided under OpRA, the cost to the employer of paying the premiums or, if higher, the salary forgone, is taxable as a benefit-in-kind. To avoid double taxation, HMRC’s practice was to treat any sickness or disability pay received under GIP cover that the employee funded indirectly through OpRA as non-taxable. However, HMRC recently announced that this treatment is incorrect and – subject to a grace period for employers and employees who had relied upon HMRC’s previous guidance – will no longer be applied. This article reviews this recent change to HMRC practice and what employers should consider doing in response.
Taxing GIP cover as a benefit-in-kind
No taxable benefit-in-kind arises where an employer bears the full cost of providing sick or disability pay cover to its workforce.
However, this exemption is effectively overridden where cover is provided under OpRA. The OpRA rules instead mean that where employees sacrifice or otherwise forgo part of the salary they would otherwise receive in order to increase their personal cover, a taxable benefit-in-kind will arise.
Taxing sickness and disability payments to employees
In summary, sickness or disability pay received by employees under a GIP arrangement are taxed as earnings to the extent they are attributable to sums paid by the employer (e.g. premiums paid for the cover). However, provided certain conditions are met, payments that derive from contributions made directly by the employee (e.g. where the employee pays part of the premium for enhanced GIP cover from their post-tax salary) are not taxed as employment income.
This means that where an employee indirectly funds their personal GIP cover under OpRA (by sacrificing pay which is then used by the employer to pay the insurance premium), in principle the cover received would be taxed as a benefit-in-kind and any associated sickness or disability pay would be taxed as earnings – giving rise to an element of double taxation.
To avoid this outcome, HMRC confirmed to the Association of British Insurers (ABI) in October 2019 that, in practice, they would treat any salary sacrificed or otherwise forgone under OpRA in return for GIP cover as an employee contribution. On that basis, whilst the provision of GIP cover under OpRA would be taxable as a benefit-in-kind, HMRC would not treat any associated sickness or disability pay received as taxable employment income.
However, HMRC recently withdrew that practice subject to a grace period for employers and employees who had relied upon HMRC’s previous guidance.
How has HMRC’s practice changed?
HMRC have now announced that the practice they advised to the ABI in 2019 was incorrect and, therefore, under current law there will be an element of double taxation where employees receive GIP cover under OpRA and subsequently receive associated sickness or disability payments.
However, where employers and employees placed reliance on HMRC’s confirmations to the ABI, HMRC have announced that their previous practice will be phased out as follows:
- In relation to relevant sick pay payments made to employees or former employees between 15 October 2019 and 31 December 2023 inclusive, HMRC will not pursue a charge to tax on earnings to the extent that the payments are (or are derived from) amounts that can be or have been attributed on any just and reasonable basis to salary foregone in periods starting on or after 6 April 2017 in return for GIP cover; and
- Relevant sick pay payments made on or after 1 January 2024 will be treated as non-taxable to the extent that they are made, or derive, from amounts that can be attributed on any just or reasonable basis to salary foregone between 15 October 2019 and 31 December 2023 in return for GIP cover.
Additionally, where repayment claims (including overpayment relief claims and PAYE adjustments) were made between 15 October 2019 and 1 December 2022 inclusive, to the extent these claims related to sick pay 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 in periods starting on or after 6 April 2017 in return for GIP cover, HMRC will not revisit the tax treatment.
In other circumstances, sick and disability pay that derive from GIP cover provided under OpRA will be taxable as earnings in addition to the cover itself being taxed as a benefit-in-kind.
HMRC will assume that employers relied on its guidance to the ABI unless details of any relevant claim (and, presumably, any other correspondence with HMRC in other circumstances) indicate there was no such reliance.
What should employers do?
Employers should consider reviewing any GIP cover they provide under OpRA to confirm what sickness and disability payments might be made tax free under HMRC’s previous practice over the transitional period, and what payments should be made subject to the deduction of tax on earnings.
Employers might also consider seeking independent advice on any methodology that they propose to use to attribute sickness or disability payments to specific amounts forgone under OpRA to ensure their approach can be supported as just and reasonable.
Any relevant employee communications relating to an employer’s flexible benefits scheme may also require a review and update in light of these developments.
Please contact the authors of this article, or your usual KPMG in the UK contact, to talk through how KPMG could help you manage your transition to the new tax treatment and communicate this to employees.