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HMRC internal manual

National Insurance Manual

HM Revenue & Customs
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Class 1 NICs : Earnings of employees and office holders : Funded Unapproved Retirement Benefit Schemes (FURBS) up to 5th April 2006: Payments made by an employer into a scheme on or after 6 April 1998:

Single trust fund covering a number of employees – discretionary trust

Payments in

Under a truly discretionary trust, allocation of the benefits is at the discretion of the trustees. FURBS constructed under discretionary trust arrangements need to be very closely scrutinised, as payments into a truly discretionary trust may escape NICs liability, because at the time the payment is made into the fund it is not a payment made for an individual employee. If, however, you can establish that a payment has been made to or for the benefit of an employee, then the trust will not be truly discretionary and the payment made will be a payment of earnings for NICs purposes.

To assist with the assessment of NICs in such discretionary situations, legislation was introduced with effect from 6 April 1999.

The legislation applies in relation to payments into a scheme which are made for the benefit of more than one employee and where, under the terms of the scheme, each employee has an interest in the fund from which the benefits are to be allocated but the allocation of benefits is itself wholly discretionary.

The legislation is now contained in regulation 24 and paragraph 13 of Schedule 2 to the Social Security (Contributions) Regulations 2001. It provides that the amount of earnings paid with a view to the provision of benefits under a retirement benefits scheme is to be calculated as follows:

  • where the separate benefits to be provided to each individual are known at the time the payment is made into the scheme, on the basis of the payments which would have had to be made to secure those benefits: and
  • where the separate benefits to be provided to each individual are not known at the time the payment is made into the scheme, on the basis of apportioning the payment equally between the beneficiaries under the scheme.



An employer makes a payment of £30,000 into a discretionary FURBS in respect of three employees.

At the time of payment, it is not known how the benefits from the scheme will be split between the three of them, but the provisions of the trust require each member to derive a benefit.

To assess the NICs due, the payment of £30,000 should be split equally between the three members, and NICs calculated on that basis. In this case, each member would have NICs assessed on £10,000.

As outlined in the opening paragraph, in a truly discretionary FURBS, allocation of benefits is at the discretion of the trustees. The legislation introduced from 6 April 1999 assists with the assessment of NICs in discretionary situations, but the scheme must require all of the members to derive a benefit for the legislation to apply. This is because it must be possible to say that each member has an interest in the fund in order to be able to hold that there has been a payment of earnings paid to or for the benefit of an employee.

If the trustees have absolute discretion as to which and how many members will obtain a benefit and the amount they will obtain, then the apportionment provisions will not apply.  In that event, none of the employees covered by the trust arrangements can be said to derive a benefit from any payment made into the trust – no NICs liability can therefore arise since the requirements of section 6(1) of the Social Security Contributions and Benefits Act 1992 are not satisfied. See NIM02015for guidance regarding section 6(1).


Payments out

Payments out of FURBS will only be liable for NICs if they are derived from employment and are not otherwise excluded from liability. Most payments should, however, be excludedfrom 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.

See NIM02158  for guidance where there is a separate trust for each employee, and NIM02159 regarding the position where there is one trust covering a number of employees and each has a distinct and separate share of the fund.

For details of the types of schemes which are excluded from liability for Class 1 NICs, seeNIM02161.

For details of the Class NICs position on payments made from 6th April 2006:

  • into an employer-financed retirement benefits scheme (“EFRBS”), see NIM02755 (overview) and NIM02757; and
  • out of an EFRBS, see NIM02760 (contents).