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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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Non-approved schemes: arrangements for providing security for payment of benefits in future

Section 386 ITEPA 2003, Section 248 FA04 and section 307 ITEPA 2003

To provide benefits under a non-approved scheme, an employer may have made contributions to an independent trust set up for the purpose. But an employer may simply have promised to provide retirement or death benefits when the time comes.

In the latter case, employees often required some form of security to reassure them that the promise would be met. This could be done in a variety of ways, but there was no charge under Section 386 ITEPA 2003 (employer contributions to a non-approved scheme) when this was done. To achieve this, the employer may have:

  • executed 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
  • executed 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
  • acquired 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 was that they were put in place solely to provide the employee with security or reassurance that the employer’s promise would be met. So if there was an intention from the outset to use those assets to fund or pay for the retirement benefits then a charge under Section 386 ITEPA 2003 does arise where the contribution is made prior to 6 April 2006 (see EIM15412). Section 386 is repealed with effect from that date, so there can be no charge in respect of a contribution after 5 April 2006 in any event.

Before 6 April 2006, there is no charge under the benefits code in respect of any provision of security because Section 307 ITEPA 2003 exempts it (see EIM21800).