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HMRC internal manual

National Insurance Manual

From
HM Revenue & Customs
Updated
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Class 1 NICs : Earnings of employees and office holders : Funded Unapproved Retirement Benefit Schemes (FURBS) up to 5th April 2006: General

FURBS are Funded Unapproved Retirement Benefit Schemes. They are “unapproved” in so far as they fall outside the scope of Inland Revenue tax approval for retirement benefit schemes. These schemes generally sprang up after the introduction of an ‘earnings cap’ in 1989 which set a limit on the amount of earnings for which contributions could be paid to a tax-approved pension scheme. They effectively “top-up” the sums available through the tax approved schemes.

Most FURBS are set up under trust as the Inland Revenue grants a lower tax charge on the investment return if:

  • the scheme is set up under trust, and
  • is established for the sole purpose of providing relevant benefits within the meaning of section 612 of the Income and Corporation Taxes Act 1988 (ICTA). (See SE15020 for guidance on the definition of “relevant benefits”.)

There may be:

  • a separate trust for each employee concerned, or
  • there may be a class of beneficiaries, which include the employee, and the trustees retain discretion over entitlement to the fund.

A FURBS may also be in the form of an insurance contract in the employee’s name with the employer making payment in the form of premiums.

Payments into and out of FURBS are generally earnings for the purposes of NICs because they are “remuneration or profit derived from an employment” within the meaning of section 3(1) of the Social Security Contributions and Benefits Act 1992. A liability for Class 1 NICs arises because the payments are “paid to or for the benefit of an earner” as required by section 6(1) of that Act. See NIM02010 and NIM02015 for guidance on the meaning of sections 3(1) and 6(1).

Most payments out of FURBS are, however, capable of being excluded from NICs by virtue of paragraph 1 of Part VI of Schedule 3 to the Social Security (Contributions) Regulations 2001 because they can be accepted as payment of a pension. Payment by way of a pension can include a pension commuted to a lump sum and this is the usual form of payment out of a FURBS.

NIC avoidance and FURBS

The label “retirement benefit” can be misleading and not every trust described as a FURBS will provide a genuine pension. They are sometimes used as a NIC avoidance measure and some ‘FURBS’ are set up with the sole intention of deferring a payment of earnings to a future date in a disguised form in the belief that it will avoid NIC liability.

A typical example would be an employer setting up a trust for an individual employee (often a company director) and paying into the trust a lump sum perhaps equivalent to the annual bonus. Rather than using the money to provide a later pension, the trustees pay the money out to the employee a few days or weeks later.

In this type of case the payment to the trust is a payment of earnings as it is clearly derived from the employment and will therefore satisfy section 3(1) of the Social Security Contributions and Benefits Act 1992. See NIM02010 for guidance regarding the meaning of “earnings”.

Such a payment will also satisfy section 6(1) of the same Act as it will be a payment made “for the benefit of” the individual employee. A liability for Class 1 NICs will therefore arise if the earnings exceed the earnings threshold. See NIM02015 and NIM01008.

For details of the Class 1 NICs position on payments into, and out of, retirement benefits schemes from 6th April 2006, see NIM02700 (contents).