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HMRC internal manual

National Insurance Manual

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HM Revenue & Customs
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NICs avoidance: employment income provided through third parties: Employer Financed Retirement Benefit Schemes - example 1 payments disregarded from earnings

Example 1 - Payments into and from an EFRBS

The arrangement

  1. In April 2012 company B established an EFRBS for its four directors, to provide retirement benefits at retirement or in the event of early retirement due to ill health or disability. The trustees established sub-trusts for each director.
  2. In May 2012 company B paid significant amounts of money to the EFRBS trustees and asked them to allocate the money equally amongst each of the sub-trusts.
  3. The trustees complied with the company’s request.
  4. One director planned to retire on 31 January 2015 at age 60. The company asked the trustees to make arrangements to begin paying this director a pension from the trust funds at that time.
  5. The trustees started paying the pension from 1 February 2015, in equal monthly instalments.

The payments that the company made to the EFRBS’ trustees are not earnings. The authority for this is Revenue & Customs v Forde and McHugh Ltd [2014] UKSC 14.

HMRC considers that the pension to be paid to this director is derived from the employment and so is treated as earnings under section 3(1) of the SSCBA 1992. As all employments have ended when the director retires and the pension will be paid in equal monthly instalments until death, then paragraph 10 of Part 6 of Schedule 3 to the SS(C)R 2001 applies. The pension payments are, therefore, disregarded from earnings, so Class 1 NICs are not due, see NIM02767.

Payment of the pension is considered a relevant step within section 554C of ITEPA 2003, but it does not apply because section 554S ITEPA 2003 ensures that the step does not count as employment income. This is because the provision of pension income is chargeable to income tax under Part 9 of ITEPA 2003, see EIM45610. So, there is no amount that counts as employment income for income tax purposes.

The commentary in this example is limited to the payments that can be disregarded from earnings under Part 6 of Schedule 3 to SS(C)R 2001.

When the trustees allocate money among the sub-trusts, they are taking relevant steps that give rise to income tax and Class 1 NICs, see NIM53050.