You may have heard the term ‘optional remuneration arrangements’ or OpRA but do you know what it means and how it can help your staff?
What is an Optional Remuneration Arrangement?
An OpRA is also known as ‘salary sacrifice.’ In this arrangement, an employee agrees to take less cash salary in exchange for a non-cash benefit from their employer. It’s basically swapping some of their pay for something else of value.
How do these arrangements work?
Here’s an example of how it would work;
Sarah earns £40,000 a year.
Her employer offers her a choice: keep her full salary or take £2,000 less in cash but receive private health insurance that would normally cost £2,500 if she bought it herself.
If Sarah takes the deal:
- Her cash salary drops to £38,000
- She gets health insurance worth £2,500
- Her total package is actually worth £40,500
Both Sarah and her employer can benefit:
- Sarah gets something worth more than the cash she gave up
- Her employer might save on certain payroll taxes
- The company may get a better deal on the insurance than Sarah could get on her own
Tax rules for OpRAs
The tax rules relating to this changed in 2017. When you swap salary for benefits, you pay tax on whichever is higher:
- The cash you gave up
- The normal taxable value of the benefit
So, to use our previous example, Sarah would pay tax on the £2,500 value of the health insurance benefit (not the £2,000 salary she gave up) because that amount is higher.
This is the amount to report on P11D to ensure that the employee is paying the correct amount of tax on the benefit, and the employer pays the correct amount of Class 1A NIC
Some benefits still work better under these arrangements
Not all benefits are treated the same way. These options still offer good tax advantages:
- Pension contributions
- Childcare vouchers (if the vouchers started before October 2018)
- Bike-to-work schemes
- Electric and ultra-low emission cars
- Certain housing benefits
For these ‘exempt benefits,’ you’re taxed on the benefit itself rather than the salary you gave up, although invariably the amount sacrificed will be less than the amount of the benefit.
There are important considerations for both the employer and employee;
For the employer
Get it in writing
Make sure the arrangement is clearly documented and understood by the employee.
Know the rules
Understand what you need to report to HMRC, ensuring correct compliance.
Be clear
Explain to employees how this might affect their overall finances.
Stay flexible
Allow changes when employees experience major life events.
For employees
Consider the bigger picture
A lower cash salary might affect:
- Your ability to get a mortgage
- Your state pension
- Maternity/paternity pay
- Benefits like Universal Credit
Compare values
Make sure the benefit is worth the salary you’re giving up.
Check your tax situation
Understand if the arrangement actually saves you money.
Are these arrangements still worthwhile?
Even though the tax advantages aren’t as good as they used to be, these arrangements can still be valuable for:
- Getting better workplace benefits
- Tax-efficient pay for the exempt benefits listed above
- Having more choice in how you receive your compensation
More employers now use these arrangements as part of their overall benefits package rather than just to save on taxes.
Optional Remuneration Arrangements can be a good way to receive workplace benefits, especially for things like pensions and green transportation options. However, it’s important to understand how giving up some salary might affect your broader financial situation.
