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Employer financed retirement benefit schemes: Avoiding pension contribution restrictions
06 November 2009
From 6 April 2010 the top rate of income tax will increase to 50% on earnings above £150,000.
Tax relief on all pension contributions will be restricted to 20% for those earning above £180,000, and tapered between 20% and 50% for earnings of £150,000 to £180,000.
Anti-forestalling provisions prevent the possibility of circumventing the new rules by pre-paying contributions prior to the new rules taking effect, as these now impose an additional tax charge of 20% on the employee on amounts paid exceeding the ‘special annual allowance’. This applies to contributions whether made by the employer or employee.
The amount of the special annual allowance depends on a number of factors on which individual advice should be taken. As a result of these changes, alternatives are now being sought for employees who fall within these new rules.
As the new restrictions only apply to registered schemes, an alternative would be for the employer to make contributions to an unregistered scheme, a so called employer-financed retirement benefit scheme (EFRBS).
Whilst the employer receives no tax relief for the contributions (which may not be an issue if, for example, the employer has losses available) the employee is not taxed on the contributions. The other main tax implications are:
• the employer will be able to get relief on contributions when benefits start to be paid and taxed on the employee
• all investment income and capital gains received by a UK resident EFRBS will be liable to tax at 40% (and 32.5% on dividends)
• EFRBS will be subject to the normal IHT charging rules
• EFRBS are not subject to investment restrictions which apply to registered schemes
• EFRBS are not subject to the annual allowance and lifetime allowance
This means the employee has the possibility of increasing his pension fund without being subject to a tax charge on the contributions.
Whilst it may be possible to subsequently transfer the pension rights in an EFRBS to a registered scheme, this may well be caught by the anti-avoidance rules.
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Niall Murphy
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