FA89 introduced the statutory concept of unapproved, or
non-approved, retirement benefit schemes. The effect of this is
that, following FA89, any scheme that is not approved will, by
definition, be an unapproved scheme.
Prior to FA89 there was, in effect, a limit on the amount of pension that an employer could provide. That was because, at that time, benefits under all occupational pension schemes had to be aggregated. If those benefits in total exceeded a specified limit, none of the related pension schemes would qualify for tax approval. This aggregation requirement was lifted in FA89 to enable employers to pay whatever pensions they wished to, whilst preserving the tax advantages for approved schemes up to certain limits. Employers achieved this by supplementing an approved scheme with an unapproved ‘top-up’ scheme.
Unapproved schemes fall into two categories:
Subject to the employer’s contributions satisfying general
principles of being revenue (not capital) in nature and wholly and
exclusively for the purposes of the employer’s trade
ICTA88/S74 – corporation tax and ITTOIA05/S34 – income
tax , the availability of relief for employer's contributions under
unapproved schemes will be determined by reference to FA89/S76.
The effect of FA89/S76 is that it matches the timing of the deduction for the employer’s contribution with the corresponding charge on the employee, and so disallows deductions for provisions that may be made for such contributions in the employer’s accounts.
Although the intention behind the statutory recognition given to unapproved schemes in FA89 was to give greater flexibility and freedom in providing for pensions, it was made clear at the time that tax advantages were restricted to those available for approved schemes. No tax advantages were to be conferred on unapproved schemes. In introducing amendments to the 1989 Finance Bill, including what is now FA89/S76 (4), the then Financial Secretary to the Treasury said:
“The amendments deal with drafting shortcomings in clause 73. The intention is that non-approved top-up pension schemes should not benefit from the tax advantages available to approved occupational schemes. As drafted the clause disallows those costs unless the employee is chargeable but it says nothing about the timing of deductions where costs are allowable. The effect is that the employer could claim a deduction in advance of payments being made if, at some point in the future, the employee would be chargeable to tax on these payments. The amendments prevent an employer from obtaining such a timing advantage.” (FA89/S76, Hansard, 8 June 1989, Column 346.)