EIM15010 - Non-approved and employer-financed retirement benefits schemes: introduction

Sections 386-400 ITEPA 2003 (as amended by Section 249 FA 2004 for receipts after 5 April 2006)

In general terms, a retirement benefits scheme is one that provides for benefits on an employee's retirement or death (for the full definitions see EIM15020).

Retirement benefits schemes can be granted approval, or after 5 April 2006 be registered, by Pension Schemes Services (PSS) . These and some other similar schemes (see EIM15030), receive significant tax advantages. For example, their investment income is not taxed, contributions to the scheme can qualify for tax relief and lump sum benefits (not pensions) are exempt from tax. Consequently, there is detailed legislation governing such schemes and the guidance in respect of them is in the Registered Pension Scheme Manual (RPSM). The Employment Income Manual guidance does not deal with registered pension schemes.

None of those tax advantages apply if the scheme is not one of those schemes (identified in EIM15030), so that legislation does not apply. Before 6 April 2006 such schemes are known as “non-approved” (or unapproved) and after 5 April 2006 as “employer-financed”. The differences in tax treatment of these two types are indicated in the following guidance.

If the receipt being considered is received after 5 April 2006 follow those parts ofthe guidance that refer to employer-financed schemes to determine its taxation.Otherwise, follow the guidance for non-approved schemes, but remember that anemployer-financed scheme may have been a non-approved scheme before 6 April2006 and so there may be transitional rules to follow (see EIM15121).

These schemes exist, both for individual employees and groups, mainly because what an approved or registered scheme can provide is limited by legislation. For example, in calculating retirement benefits that can be taken from an approved scheme before 6 April 2006, any salary above a certain sum cannot be taken into account (see EIM15172 for figures). So a non-approved scheme is often set up to provide benefits based on salary in excess of that sum.

The general structure of the legislation for non-approved and employer-financed schemes is to tax as follows:

• For non-approved schemes, employer's contributions to the scheme made before 6 April 2006 count as employment income (see EIM00512) of the employee under Section 386 ITEPA 2003 (see EIM15040). There is no equivalent charge for contributions to an employer-financed scheme made after 5 April 2006
• All lump sum payments (including commutations: see EIM15150) out of non-approved schemes count as employment income (see EIM00512) of the recipient under Section 394 ITEPA 2003 (see EIM15100). For employer-financed schemes, only “relevant benefits” (see EIM15021) count as employment income under Section 394 ITEPA 2003.
• For both non-approved and employer-financed schemes, the charge on lump sums paid out may be reduced where prior employer contributions have been taxed (see EIM15125) and where the employee has made contributions (see EIM15123 and EIM15126 for non-approved and employer-financed schemes respectively).
• A pension from any of these schemes is charged separately as pension income under Part 9 ITEPA 2003 (see EIM74001).
• See EIM15100 for guidance on how annuities, annual payments and non-cash receipts are dealt with.

See EIM15020 for the definition of non-approved and employer-financed retirement benefits schemes.

In cases where it is claimed that the facts of the case do not constitute a non-approved or employer-financed retirement benefits scheme please refer the case to Pension Scheme Services (Technical), Yorke House, Castle Meadow Road, Nottingham NG2 1BG.