Non-approved and employer-financed retirement benefits schemes: introduction
On this page
Sections 386-400 ITEPA 2003
Sections 386-400 ITEPA 2003 were amended by s249 FA 2004 for receipts after 5 April 2006, and further amended by s26 & para 14 of Sch 2 FA11 for receipts and events on or after 6 April 2011.
Retirement benefit schemes
The main characteristic of a retirement benefits scheme is that it provides for benefits on an employee’s retirement or death. Aside from this key aspect, such a scheme may in some cases provide other kinds of benefits, provide benefits at certain other times, and go under different names.
Over time, there have been quite a few changes to the tax rules applying to retirement benefit schemes: spawning many variants, as well as some exceptions. You may have to deal with issues under more than one category, mindful that the timing of payments and events determines which set of tax rules apply. The rest of this page introduces those categories and rules. If you are already familiar with the background, then here are some quick links:
- for all provision through ‘third party’ ‘employer-financed retirement benefit schemes’ (including cases where the employer is acting as a trustee), typically but not exclusively funded arrangements, see EIM45600 in the context of EIM45000,
- for other ‘employer-financed retirement benefits schemes’ (as defined in EIM15020), in particular directly-provided-unfunded arrangements, see EIM15015 - EIM15399, but at all times be mindful of the precedence of the third party rules in the bullet above,
- for legacy non-approved schemes, see EIM15400, but at all times be mindful of the historical nature of those parts of the Employment Income Manual.
Types of Schemes
At the simplest level, there are two main types of schemes: registered and non-registered.
- Registered Pension Schemes receive significant tax advantages: For example, Part 4 of FA 2004 (together with supporting schedules and related regulations) provides that their investment income is not taxed, contributions to such schemes qualify for tax relief up to a point, and lump sum benefits (not pensions) are also exempt from tax up to certain limits. There is detailed guidance available in the Pension Tax Manual (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual though mostly this is for Pension Schemes Services in Specialist PT; the Employment Income Manual does not deal directly with registered pension schemes.
You may also have heard of Approved Retirement Benefit Schemes or Exempt Approved Schemes. These were the predecessors of registered schemes. However, from 6 April 2006, the system of HMRC granting such approval was replaced with self-registration. Most approved schemes automatically became registered pension schemes on that day.
- Most of the tax advantages available to registered pension schemes do not apply if a scheme is not registered. Since 6 April 2006 such non-registered schemes have been known as ‘employer-financed retirement benefits schemes’ (EFRBS - see EIM15020 and EIM15050). An EFRBS has to provide for what are known as relevant benefits (see EIM15021), though it can provide other benefits as well.
Before 6 April 2006 such schemes were known as ‘non-approved’ (or unapproved) retirement benefits schemes (see EIM15402). These were either funded (FURBS) or unfunded (UURBS). The most obvious change in the tax rules for such schemes at 6 April 2006 was a change in the timing of when benefits were subject to tax. Whereas tax charges on FURBS typically arose at the time of funding a benefit, EFRBS charges typically apply only at the point of receipt of a benefit (as was also the case for UURBS).
The more detailed differences in tax treatment between EFRBS and their predecessors (FURBS / UURBS) are covered in this chapter of EIM (EIM15000+). This chapter is sub-divided into two sections:
* The first section ([EIM15015](https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim15015) to EIM15399) deals with the position of EFRBS from 6 April 2006 onwards. If the benefit under consideration was or will be received after 5 April 2006, follow this section of the guidance to determine its taxation. If the EFRBS was previously a FURBS or UURBS, then there may be transitional rules to follow as well (see [EIM15121](https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim15121)). * The second section ([EIM15400](https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim15400) onwards) deals with the position of non-approved retirement benefits schemes before 6 April 2006. Follow this section of the guidance for benefits received before 6th April 2006.
Part 7A ITEPA2003
Part 7A was introduced by FA2011. This contains the tax legislation on ‘employment income provided through third parties. It tackles arrangements which:
- involve third parties (including trusts or other vehicles used to reward employees), and
- seek to avoid or defer the payment of income tax.
Broadly speaking, if third-party arrangements are used to provide what is in substance a reward or recognition, or a loan - in connection with the employee’s current, former, or future employment - then an income tax charge arises.
EFRBS can be third-party arrangements, so a great many EFRBS (particularly funded EFRBS) now come under Part 7A. These rules have both general provisions applicable to steps taken under third-party arrangements including EFRBS (see EIM45000), as well as specific exceptions and transitional provisions (see EIM45600). For example, the legislation makes particular provision for steps taken by registered pension schemes - these are excluded from giving rise to income tax charges under Part 7A as they have their own tax rules in FA2004.
How EFRBS rules work with Part 7A ITEPA 2003
The EFRBS rules are in Part 6 (Chapter 2) ITEPA. If an EFRBS comes within the rules on third-party arrangements in Part 7A, it does not cease to be an EFRBS. However, the Part 7A charges get applied first, and EFRBS charges (see EIM15015) do not apply to values first counting as Part 7A income. Only sums and assets not taxed under the Part 7A rules can get taxed under the Part 6 (Chapter 2) EFRBS rules. This order of precedence prevents double charging.
In practice then, relevant benefits provided under third-party EFRBS out of rights accrued since 6 April 2011 will never get charged under the EFRBS rules, but rather through Part 7A ITEPA.
On the other hand, relevant benefits provided under an unfunded EFRBS, where the employer pays the benefit directly from company funds to a retiring or retired employee without any other complications, will normally not pass through any third-parties. Such benefits will continue to come under the Part 6 Chapter 2 EFRBS rules.
It is important to note that charges under Part 7A can arise whenever ‘relevant steps’ are taken. These steps may occur at the same or at other times than when charges would otherwise apply on benefits under an EFRBS. EIM45055 explains about relevant steps.
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
Tax charges on EFRBS, FURBS and UURBS
The general structure of the legislation for non-approved schemes and EFRBS is to tax as follows:
A - Contributions received
- For non-approved schemes (FURBS and UURBS), employer’s contributions to the scheme made before 6 April 2006 counted as employment income (see EIM00512) of the employee under s386 ITEPA 2003 (see EIM15412).
- There was no equivalent charge in connection with contributions to an EFRBS made after 5 April 2006, until the part 7A rules started to operate from 6t h April 2011.
After 5 April 2011 there can be an income tax charge by virtue of Chapter 2 of Part 7A when
B - Benefits provided
- Up to 6 April 2006, all lump sum payments (including commutations: see EIM15427) out of non-approved schemes, counted as employment income (see EIM00512) of the recipient under s394 (see EIM15420).
- After 5 April 2006, only ‘relevant benefits’ (see EIM15021) paid out of EFRBS count as employment income under s394.
- After 5 April 2011, if the relevant benefit is paid out of a third party EFRBS (see EIM45065), then the charge on employment income arises through Part 7A (see EIM45705) - unless it is excluded from charge (see EIM45601).
For both non-approved schemes and EFRBS (whether under a third-party arrangement or not), the charge on lump sums paid out may be reduced where:
- if prior employer contributions have been taxed, see EIM15423 for non-approved schemes, EIM15125 for EFRBS subject to s394, and EIM45620 for EFRBS subject to Part 7A,
- if the employee has made contributions, see EIM15424 for non-approved schemes, EIM15126 for EFRBS subject to s394 and EIM45615 for EFRBS subject to Part 7A.
- A pension from any of these schemes is charged separately as pension income under Part 9 ITEPA 2003 (see EIM74001, EIM15021, EIM15015 and EIM45610). Pension income charged to tax under Part 9 ITEPA 2003 is not charged under s394 nor through Part 7A.
For guidance on how annuities, annual payments and non-cash receipts are dealt with, see:
In cases where it is claimed that the facts of the case are not subject to Part 7A, do not constitute an EFRBS, nor a non-approved scheme, please refer the case to Pension Scheme Services (Technical), FitzRoy House, Castle Meadow Road, Nottingham NG2 1BD.