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HMRC internal manual

Employment Income Manual

Employer-financed retirement benefits schemes: arrangements for providing security for payment of benefits in future

Section 307 ITEPA (as amended by Section 248 FA 2004)

[Notice: the guidance on this page should be read with the notice at the top of EIM15015]

To provide benefits under an employer-financed retirement benefits scheme, an employer may make contributions to an independent trust set up for the purpose. But an employer may simply promise to make retirement or death benefits when the time comes.

In the latter case, employees often require some form of security to reassure them that the promise will be met. This can be done in a variety of ways: for example, the employer may:

  • execute a legal charge over specific business assets. This means that if the employer goes into liquidation, those assets will be realised firstly to meet the benefits promise
  • execute a legal charge generally over all business assets. This means that if the employer goes into liquidation, satisfying the benefits promise will take first call on those assets
  • acquire assets sufficient to meet the accrued liability. An actuary calculates how much an employee would need to be given at any particular time to enable the employee to invest and provide the pension promised by the employer. Assets acquired cover that amount.

The common feature of all these arrangements is that they are put in place solely to provide the employee with security or reassurance that the employer’s promise will be met. Following the repeal of Section 386 ITEPA 2003 there can be no charge in any event on an employee in respect of any employer contribution after 5 April 2006.

There is normally no charge under the benefits code in respect of any provision of security because Section 307 ITEPA 2003 exempts it (see EIM21800). However, Section 248 FA 2004 amended Section 307 so that the cost of insuring against the employer’s insolvency is no longer within that exemption. HMRC interprets the new provision at Section 307(1A) ITEPA as applying only to the cost of premiums paid in relation to a policy of insurance provided by a regulated insurer and not to the cost of other means of providing security such as those outlined above.