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 and EIM15402 respectively for an employer-financed retirement benefits scheme and a non-approved scheme.

From 6 April 2006, retirement benefits schemes can be registered by Pension Schemes Services (PSS). Registered pension schemes receive significant tax advantages. Under the legislation in Part 4 (together with supporting schedules of Finance Act 2004 and related regulations) 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 a registered pension scheme. Since 6 April 2006, such non-registered schemes are known as “employer-financed retirement benefits schemes”. Before 6 April 2006 they were known as “non-approved (or unapproved) retirement benefits schemes”.

The difference in tax treatment of these two types of scheme is indicated in the guidance in this chapter of EIM. The guidance is sub-divided into two sections. The first section (EIM15015 to EIM 15399) deals with the position of employer-financed retirement benefits schemes from 6 April 2006 onwards. The second section (EIM15400 onwards) deals with the position of non-approved retirement benefits schemes before 6 April 2006.

If the receipt being considered is received after 5 April 2006 follow the first section of the guidance for employer-financed retirement benefits schemes to determine its taxation. Otherwise, follow the second section of the guidance for non-approved schemes. But remember that an employer-financed retirement benefits scheme may have been a non-approved scheme before 6 April 2006 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 could be taken from an approved scheme before 6 April 2006, any salary above a certain sum could not be taken into account (see EIM15429 for figures). So a non-approved scheme was 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 retirement benefits 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 (seeEIM15412). There is no equivalent charge for contributions to an employer-financed retirement benefits scheme made after 5 April 2006
• All lump sum payments (including commutations: see EIM15427) out of non-approved schemes count as employment income (see EIM00512) of the recipient under Section 394 ITEPA 2003 (seeEIM15420). For employer-financed retirement benefits schemes, only “relevant benefits” (see EIM15021) count as employment income under Section 394 ITEPA 2003.
• For both non-approved and employer-financed retirement benefits schemes, the charge on lump sums paid out may be reduced where prior employer contributions have been taxed (see EIM15423 and EIM15125 respectively for non-approved and employer-financed retirement benefits schemes) and where the employee has made contributions (see EIM15424 and EIM15126 respectively for non-approved and employer-financed retirement benefits schemes).
• A pension from any of these schemes is charged separately as pension income under Part 9 ITEPA 2003 (see EIM74001).
• See EIM15100 and EIM15420 respectively for employment-financed retirement benefits schemes and non-approved schemes for guidance on how annuities, annual payments and non-cash receipts are dealt with.

See EIM15402 and EIM15020 respectively 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), FitzRoy House, Castle Meadow Road, Nottingham NG2 1BD.