Group income protection policies taken out through employer salary sacrifice schemes have been wrongly treated for tax thanks to incorrect advice given by HMRC to the Association of British Insurers back in October 2019. Even though HMRC corrected this advice in August last year, there could be a number of people who haven’t paid enough National Insurance (NI) contributions for the period in question.
You could be affected if you have received, or will receive, income from a group income protection policy which was “not fully subjected to National Insurance contributions, as it would have been under the correct taxation position” according to HMRC.
As a result, some people may not have paid enough NI to qualify for full benefits of, for example, the State Pension.
What is HMRC doing about this?
Anyone who thinks they may be affected are being asked to check their NI record for the period of time they received the relevant income, to check if they made the correct NI payments. If not, then you should contact HMRC as soon as you can.
HMRC will check the details of each case individually, and you will find out if you need to make these additional payments.
If there is a shortfall in your NI record for any of these years, then you should contact HMRC if:
• You made contributions to a GIP policy by way of salary sacrifice.
• You received sick pay from your employer under that GIP policy and that sick pay was not fully subjected to National Insurance contributions.
If necessary, then HMRC will rectify any shortfall to mitigate any impact on a contributory benefit, such as your State Pension.
Will I have to pay more tax?
The incorrect information was provided by HMRC to the ABI in the first place, so for most people there will not be “any revisit to the tax treatment of the payments you received”.
HMRC states that the incorrect guidance would most like have been relied upon by:
• Employees entering into or deciding to remain in sick pay arrangements via salary sacrifice after October 15, 2019.
• Payers and payees considering the tax treatment of sick pay payments made after October 15, 2019, where they derived from salary sacrifice arrangements.
HMRC added: “[We] will therefore not seek to revisit the tax treatment where customers have relied on the previous guidance in the following cases:
• Where sick pay payments were made to employees or former employees without deduction of tax between October 15, 2019, and December 31, 2023, inclusive to the extent that they are (or are derived from) amounts that can be or have been attributed on any just and reasonable basis to salary foregone by employees in periods starting on or after April 6, 2017.
• Where repayment claims (including overpayment relief claims and PAYE adjustments) were made between October 15, 2019, and December 1, 2022, inclusive to the extent that these claims related to sick pay payments made 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 by employees in periods starting on or after April 6, 2017.
• Sick pay payments made on or after January 1, 2024, will be accepted as non-taxable to the extent that they are made or are derived from amounts that can be attributed on any just or reasonable basis to salary foregone by employees between October 15, 2019, and December 31, 2023.”
In short, it will “assume that customers have relied on the October 15, 2019, advice unless details of the claim indicate there was no such reliance”.
We can help you meet your obligations
This is a complicated set of circumstances, so it is understandable if you are not sure whether you have been affected or not. But if you think you may have been, then please get in touch and we will explain what you need to know.