EIM06471 - Employment Income: sick pay and injury payments: provision under a salary sacrifice arrangement

Tax treatment of the right to receive sick pay

The right to receive sick pay is a benefit. Prior to 6 April 2017, where the payments received would be taxable under section 221 ITEPA 2003, this benefit was excluded by section 202(1)(c) ITEPA 2003 – see EIM06410 and EIM21820.

The OpRA legislation at paragraph 47 of schedule 2 FA 2017 inserted section 202 (1A) ITEPA 2003 to remove this exclusion where the benefit (the right to receive sick pay) was provided under a salary sacrifice arrangement. The benefit is therefore taxable when provided via salary sacrifice after 6 April 2017.

The calculation of the benefit under OpRA is set out at EIM44120 with the ‘relevant amount’ treated as earnings from the employment in the tax year the benefit is provided. The ‘relevant amount’ is the greater of the cost of the benefit or the salary foregone under the OpRA less any part of the cost made good by the employee to the persons providing the benefit on or before 6 July following the tax year in which it is provided.

In some cases, the employer may provide for the cost of sick pay by taking out an insurance policy. If so, the cost of the benefit for the purposes of calculating the ‘relevant amount’ will be the cost of the additional insurance premium paid in respect of the employee in that year.

If the employer offers the right to receive sick pay under an OpRA but does not take out insurance to fund the benefit the marginal cost of the benefit is nil. In these cases, the ‘relevant amount’ treated as earnings is the salary forgone under the OpRA.