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HMRC internal manual

National Insurance Manual

NICs avoidance: employment income provided through third parties: Employer Financed Retirement Benefit Schemes - example 2 relevant step counts as employment income

Example 2 - relevant steps counting as employment income for tax and earnings for NICs

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 equally amongst each of the sub-trusts.
  3. The trustees complied with the company’s request.
  4. One of the directors planned to retire on 31 January 2015 at age 60. The company asked the trustees to make arrangements to begin paying this director’s pension from the trust funds at that time.
  5. The trustees started paying the pension from 1 February 2015, in equal monthly instalments.

After the trustees accept the payments from the employer, they allocate equally to the sub-trusts the amounts received. This represents a relevant step within section 554B(1)(b) ITEPA, see EIM45095. The value of the relevant step in respect of each director counts as employment income.

The amount which counts as employment income under Part 7A of ITEPA 2003 is treated as earnings under regulation 22B of the SS(C)R 2001. When assessing Class 1 NICs, this amount must be added to any other earnings paid in the same earnings period that the date of the relevant step is in.

In this example there may be more than one relevant step, the value of which counts as employment income. If that is the case, see EIM45725.

For commentary on the pension payments, see NIM53000.