EIM06472 | Employment Income: sick pay and injury payments: provision through a salary sacrifice arrangement

Tax treatment of sick pay received during employment

Where an employee receives a sick pay payment due to absence from work because of sickness or disability, the payment is treated as earnings from the employment under section 221 ITEPA 2003, if it is not already earnings within the scope of section 62 ITEPA 2003. If part of the sick pay payment is made from funds to which the employee has contributed, the amount of the payment which can be apportioned to these contributions will not be taxable under section 221(4).

On entering into an OpRA the employee is no longer entitled to the amount of salary foregone. Amounts of salary foregone under an OpRA do not constitute an employee contribution to the funds from which the sick pay is paid and there will be no apportionment of the taxable amount under section 221(4) ITEPA 2003. While the employer may use the salary foregone to create a contingency fund or to take up third party insurance this would be an employer contribution and not an employee contribution. For the purposes of calculation at EIM06430, the amounts foregone are therefore not counted as ‘B’ ‘Employee Contributions’.

If the employee makes contributions out of their taxed income and separate from any salary sacrifice arrangement these contributions will be counted as ‘B’ ‘Employee Contributions’ in the calculation at EIM06430 to the extent that they have funded sick pay subsequently received.

Section 735 ITTOIA 2005

As the amounts of salary forgone under an OpRA are not employee contributions any scheme funded wholly by such amounts will not result in the treatment set out at EIM06420. The payments of sick pay derived from that scheme will be taxable in full under section 221 ITEPA 2003.

However, if the employee has paid contributions out of their net income, then they will be employee contributions and the sick pay paid out is not taxable as employment income. But it may be an annual payment and subject to a charge to be considered by reference to chapter 7 of part 5 ITTOIA 2005 (see IPTM6100 and subsequent).