Under a truly discretionary trust, allocation of the benefits is
at the discretion of the trustees. FURBS constructed under
discretionary trust arrangements need to be very closely
scrutinised as payments into a truly discretionary trust may escape
NIC liability, because at the time the payment is made into the
fund it is not a payment made for an individual employee. If,
however, you can establish that a payment has been made to or for
the benefit of an employee then the trust will not be truly
discretionary and the payment made will be a payment of earnings
for NICs purposes.
To assist with the assessment of NICs in such discretionary
situations legislation was introduced with effect from 6 April
1999.
The legislation applies in relation to payments into a scheme
which are made for the benefit of more than one employee and where,
under the terms of the scheme, each employee has an interest in the
fund from which the benefits are to be allocated but the allocation
of benefits is itself wholly discretionary.
The legislation is now contained in regulation 24 and
paragraph 13 of Schedule 2 to the Social Security (Contributions)
Regulations 2001. It provides that the amount of earnings paid with
a view to the provision of benefits under a retirement benefits
scheme is to be calculated as follows:-
Example:
An employer makes a payment of £30,000 into a
discretionary FURBS in respect of three employees.
At the time of payment it is not known how the benefits from
the scheme will be split between the three of them, but the
provisions of the trust require each member to derive a benefit.
To assess the NICs due, the payment of £30,000 should be
split equally between the three members and NICs calculated on that
basis. In this case each member would have NICs assessed on
£10,000.
As outlined in the opening paragraph, in a truly
discretionary FURBS allocation of benefits is at the discretion of
the trustees. The legislation introduced from 6 April 1999 assists
with the assessment of NICs in discretionary situations but the
scheme must require all of the members to derive a benefit for the
legislation to apply. This is because it must be possible to say
that each member has an interest in the fund in order to be able to
hold that there has been a payment of earnings paid to or for the
benefit of an employee.
If the trustees have absolute discretion as to which and how
many members will obtain a benefit and the amount they will obtain,
then the apportionment provisions will not apply. In that event
none of the employees covered by the trust arrangements can be said
to derive a benefit from any payment made into the trust – no
NIC liability can therefore arise since the requirements of section
6(1) of the Social Security Contributions and Benefits Act 1992 are
not satisfied. See
NIM02015 for guidance regarding section
6(1).
Payments out of FURBS will only be liable for NICs if they are
derived from employment and are not otherwise excluded from
liability. Most payments should, however, be excluded from NICs by
virtue of paragraph 1 of Part VI of Schedule 3 to the Social
Security (Contributions) Regulations 2001 because they can be
accepted as payment of a pension. Payment by way of a pension can
include a pension commuted to a lump sum and this is the usual form
of payment out of a FURBS.
See
NIM02158 for guidance where there is a
separate trust for each employee and
NIM02159 regarding the position where
there is one trust covering a number of employees and each has a
distinct and separate share of the fund.
For details of the types of schemes which are excluded from
liability for Class 1 NICs see
NIM02161.
For details of the Class NICs position on payments made from
6th April 2006:
