Public Sector | 01 July 2010

The Coalition Agreement made between the Liberal Democrats and Conservatives, published on 20 May 2010, together with the Queen’s Speech delivered on 25 May 2010, contained several proposals for tax reform, which in the government’s view are aimed at creating a fairer and simpler taxation system. The tax measures that have been proposed widely reflect most of the Conservative and Liberal Democrat manifesto pledges, though the scope of a few of the measures has been reduced. [Continue Reading]

Corporate and commercial | 01 June 2010

It was hardly surprising and perhaps inevitable given the current economic and financial crisis, coupled with a general election, that the government would attempt to find ways to raise funds to repay the public debt, without adversely affecting the majority of voters. One such method devised by the Labour government was to restrict tax relief on contributions to registered pension schemes, with effect from 6 April 2011, for high-income earners.

The Labour government introduced legislation in the Finance Act 2010 to restrict the tax relief for those people with pension savings, and for those who have a gross income of £150,000 and over. Relief will be tapered away so that for those earning in excess of £180,000, it is worth only 20%, the same as to a basic rate taxpayer. This means that individuals affected by the restriction will continue to receive at least basic rate relief on all pension contributions (subject to the existing annual and lifetime allowances).

Prior to the election, the government released draft technical guidance that explains the key elements of the legislation and how to calculate the high-income charge relief. It is expected that the draft guidance will be incorporated into the technical pages of HM Revenue & Customs (HMRC)’s Registered Pension Scheme Manual following the end of the consultation period. This article aims to provide an overview of the main provisions of the new legislation and draft guidance, while briefly considering the rationale for imposing such a restriction and the interim measures that have been introduced that will apply until the new legislation commences.


The Labour government stated in the Pre-Budget Report (PBR) 2009 that generous tax relief is provided to promote greater independence and wellbeing in later life, in recognition that pensions are less flexible than other forms of saving and to encourage support from employers. According to the consultation document released at the same time as PBR 2009, tax relief on pensions was estimated to be worth around £28.4bn (2% of GDP) in 2008/09.

To justify the proposed restrictions on pension relief for high earners, the government argued that its aim was to deliver a system of pensions tax relief that is fair, affordable and sustainable. According to recent government estimates, the cost of pensions tax relief in the UK has doubled over the past decade and the proportion of tax relief going to those on the highest incomes has risen at a remarkable rate. In the Labour government’s view, which was supported by their calculations, pensions tax relief currently disproportionately benefits those on the highest incomes, with around a quarter of the tax relief on pension contributions going to individuals with incomes of £150,000 and over in 2008/09, although such contributors only consist of approximately 2% of pension savers.

The restriction will therefore only apply to about 300,000 individuals who constitute about 2% of pension savers or around 1% of working-age taxpayers who currently benefit from around a quarter of the tax relief provided on pension contributions.

Anti-forestalling legislation

Naturally enough, Gordon Brown’s government was not going to risk high-income earners making large increased contributions or increasing their benefits to take advantage of the higher tax relief before the new provisions take effect in April 2011. Therefore, to prevent certain individuals from substantially increasing their pension contributions in the period between the announcement and implementation of the restrictions on pension relief, the Budget 2009 introduced an anti-forestalling regime, which took immediate effect.

The broad effect of these anti-forestalling rules introduced in the Finance Act 2009 was to allow high-income earners to continue arrangements already in place on 22 April 2009 (budget day) under the current regime, but to ensure that any higher tax relief on any additional pension savings or pension accrual effected after budget day will be clawed back.

High-Income Excess Relief Charge

As of 6 April 2011, tax relief on pension savings will be restricted for those on incomes of £150,000 or more and will be gradually tapered down so that for those on incomes of £180,000 and over the tax relief will only be worth the same as it is for a basic rate taxpayer (ie 20%).

This means that individuals affected by the restriction will continue to receive at least basic rate relief on all pension contributions (subject to the amount of the individual’s relevant UK earnings, and the existing annual and lifetime allowances that have been set at £245,000 and £1.75m for the 2009/10 year, respectively).

Tax relief is restricted by a ‘high income excess relief charge’ (HIERC). Tax relief is given on any pension contributions in the normal way and will continue to be so, eg through the net pay arrangement or relief at source. The HIERC has the effect of reducing the rate of tax relief given on pension savings to the basic rate of tax and the payment of the HIERC by the affected individual is undertaken through the current self-assessment regime.

Who does the high-income excess relief charge apply to?

The HIERC is a charge to income tax on those individuals who have:

  1. a gross income for the tax year of £150,000 or over;
  2. relevant income for the tax year of at least £130,000;
  3. membership of one or more registered pension schemes; and
  4. contributed to a registered pension scheme of which they are a member in the relevant tax year.

The individual is liable for the charge whether or not they and the pension scheme administrator concerned are UK resident, ordinarily UK resident or domiciled in the UK.

Calculating the charge

The calculation of the HIERC appears to be overly complicated and detailed and this is evidenced by the fact that the recently released guidance requires over 70 pages to explain how the charge is to be ultimately calculated. The draft guidance uses a four-step process to explain how the charge is calculated. This methodology has been followed in this article.

To calculate the HIERC, the following four steps should be followed.

Calculate the individual’s ‘relevant income’

Relevant income is income after deductions, except for pension contributions and charitable donations, plus any relevant salary sacrifice amount entered into after 21 April 2009. Employer’s pension contributions are not taken into account in the calculation of an individual’s relevant income.

If the individual has a relevant income of less than £130,000, the HIERC will not apply.

Calculate the individual’s ‘gross income’ and the ‘total pension savings amount’

Gross income is income after taking account of any deductions, except for pension contributions and charitable donations, plus the total pension savings amount, less any personal contributions. Gross income includes both the personal and employer pension contributions to registered pension schemes.

If the individual has gross income of less than £150,000, the HIERC will not apply.

A component of an individual’s gross income is the total pension savings amount and it is therefore necessary to determine this amount. The total pension savings amount, for any tax year, is the total of all the individual pension savings amounts for each arrangement relating to that individual under a registered pension scheme of which they are a member. The total amount will be dictated by the particular type of arrangement and, given the complexity of the rules, it would be impossible to adequately summarise the different calculations in this article. However, the individual amounts are broadly measured at arrangement level, using a method that depends on the nature of the particular arrangement (ie hybrid arrangements, money market arrangements, cash balance arrangements or defined benefit arrangements).

Determine the ‘appropriate rate’ of the charge.

The restriction of the relief is applied by clawing back the relief given on an individual’s tax return. The HIERC is determined by multiplying the total pensions saving amount by an ‘appropriate rate’.

The ‘appropriate rate’ in relation to the total pension savings amount for a tax year is:

    1. 0% in relation to so much (if any) of that amount as, when added to the individual’s reduced net income for the tax year, does not exceed the basic rate limit;
    2. 20% in relation to so much (if any) of that amount as, when so added, exceeds the basic rate limit but does not exceed the higher rate limit; or
    3. 30% in relation to so much (if any) of that amount as, when so added, exceeds the higher rate limit.

‘Reduced net income’ for these purposes is the amount determined after step three of s23 of the Income Tax Act (ITA) 2007, which is broadly:

  1. identified total income;
  2. less any reliefs listed at s24 ITA 2007 (broadly deductions for trade and property losses); and
  3. less any personal allowances the individual may have.

For individuals with a gross income above £180,000, the appropriate rate is 30%. In those circumstances, where the individual’s gross income for the tax year is less than £180,000, the percentages at ii) and iii) above are each reduced (but to no less than 0%) by 1% for every £1,000 by which it is less than £180,000.

Calculate the high-income excess relief charge

The actual tax is charged on an individual’s ‘total pension savings amount’. Therefore, once the appropriate rate of the charge has been determined, this should be applied to the pension savings amount to calculate the high-income excess relief charge.


As it seems with each new reform proposed by HMRC, targeted anti-avoidance rules will also be introduced with the new legislation. Broadly, these rules will apply in circumstances whereby a scheme is in place that seeks to reduce the member’s gross or relevant income, or their total pension savings amount, which is replaced with some other benefit, or such reduction is redressed by an increase in their income or pension savings amount in a different year.

In circumstances where it is found that a scheme exists that is devised to avoid the HIERC, the individual will be treated as if the gross income for the tax year and total savings amount for the tax year were what they would have been in the absence of such a scheme.


With the introduction of the 50% income tax rate from 6 April 2010 and the abolition of personal allowances for high earners from the same date, the generous tax relief currently afforded to all individuals was never going to survive in the current economic climate. With the Labour government’s assertion that high-income earners (ie those earning in excess of £150,000) representing about 2% of all pension savers receive a quarter of all tax relief on contributions, it is easy to see why the restriction was introduced, particularly with the recent general election.

However, the new rules appear to be overly complex, and have been widely criticised by advisers and the business community in general. It is likely that the new rules will result in significant compliance costs for those affected individuals, and these new rules do little to improve the UK as being an attractive place for highly skilled individuals to work and reside. Perhaps it would have been a better and easier solution for Brown’s government to simply reduce the amount of the annual allowance or lifetime allowance, which are both very generous in comparison to some other jurisdictions?

Corporate and commercial | 01 May 2010

6 April 2006 saw the introduction of the Employer Financed Retirement Benefit Scheme (EFRBS), replacing the now defunct Funded Unapproved Retirement Benefit Scheme. An EFRBS is an unregistered (ie not registered with HM Revenue & Customs) pension scheme commonly used to provide retirement benefits to high-net-worth individuals (defined as those earning over £150,000 per annum for the purposes of this article). It is commonly used as a retirement vehicle to incentivise and reward key employees, directors or shareholders.

The employer will usually establish a trust that has the purpose and power to enable the employer to provide retirement benefits to employees. Employees cannot make contributions to the EFRBS. There are two types of EFRBS: a funded EFRBS and an unfunded EFRBS.

Types of EFRBS

Funded EFRBS

The employer will contribute funds to the trust in advance of the employees’ retirement. These funds are then allocated for the benefit of those employees. The EFRBS can invest this money, as the trustees see fit, in a wide range of assets. It provides a way to ring-fence money and assets in a separate fund away from the company so that such money is not vulnerable to downturns in the employer.

Unfunded EFRBS

In an unfunded EFRBS the employer will not make any contributions in advance of retirement. The employer will only contribute to the EFRBS during the retirement of the employee. Unfunded EFRBS may also be set up under trust. However, if the trust is established for this purpose the employer may have to make a nominal contribution to the trust. It is possible for the unfunded element of the pension to be secured by a third party and/or the employer to resolve any doubts the employee may have regarding the availability of funds at the time of their retirement.

How an EFRBS benefits from being unregistered

An EFRBS, being an unregistered arrangement, is not subject to the restrictions placed on registered pension schemes and as such is a more flexible investment vehicle. For example:

  1. Unregistered pension schemes benefit from less restrictive investment opportunities than registered pension schemes. EFRBS may invest in stocks, shares, commercial property, residential property, cash deposits, fixed interest investments, equities, derivatives, unit trusts and investment trusts.
  2. An EFRBS can lend and borrow money, invest in unquoted companies and effect transactions with connected parties, for example scheme members or the employer, as long as these transactions are on a commercial basis.
  3. There is no requirement for an EFRBS to set a specific retirement age (although after 6 April 2010, benefits can only be taken from age 55 onwards).
  4. Contributions made to an EFRBS are not subject to either the annual allowance or the lifetime allowance; the annual allowance (currently £245,000 and rising to £255,000 for the 2010/11 tax year) being the annual limit on tax-free pension savings and the lifetime allowance (£1.75m for the current tax year, rising to £1.8m for the 2010/11 tax year) being the total value of an employee’s pension in all registered schemes they may build up without paying extra tax.



The tax implications associated with payments made to individuals under an EFRBS will be dictated by the nature of such payment. This article outlines the key tax considerations for employers and employees.

Corporation tax

The employer will not be entitled to a corporate tax deduction until ‘qualifying benefits’ are paid out of the EFRBS. Qualifying benefits are provided where there is a payment of money or transfer of assets otherwise than by a loan and include pensions, annuities, lump sums or other payments out of the EFRBS.

Income tax and national insurance contributions (NICs)

Where the statutory conditions are met, there would be no income tax liability or NICs for any individual when the company contributes funds into an EFRBS. The employers contributions into an EFRBS will not be subject to income tax in the employees’ hands, until a qualifying benefit is paid out of the EFRBS.

The payments of qualifying benefits out or under an EFRBS are not subject to NICs provided that they could have been paid under a registered pension plan. In circumstances where the employment relationship between the employer and employee has ceased, there should not be any NICs charge on the benefits paid from an EFRBS, provided that the benefits are within the limits of benefits that can be paid under a registered scheme. Registered pension schemes may only pay a tax-free lump sum retirement benefit of up to a maximum of 25% of the value of the scheme benefits. Therefore, in order to avoid any NICs charge from arising, the lump sum must not exceed 25% of the fund.

Relevant benefits and other benefits paid out of the EFRBS will, if the beneficiary is UK tax resident, be subject to UK income tax at the appropriate rates at that time, taking into consideration the individual’s level of taxable income. The payment of an annuity or pension will be taxable as pension income.

Inheritance tax (IHT)

There is no IHT on the creation of an EFRBS or on the death of a member and the funds held within the EFRBS should not be included in any of the beneficiaries’ estates for IHT purposes.

Depending on the particular circumstances of the EFRBS, IHT charges may apply on the value of the fund on each tenth anniversary of the establishment of the EFRBS. The maximum rate of charge on a ten-year anniversary is 6% of the value of the assets.

Specific benefits for high earners

Contributions to EFRBS are not caught by the new pension rules (brought in by the Budget 2009) that can trigger a tax charge on individuals in respect of contributions made by the company. Accordingly, high earners are able to avoid the 30% pension input tax charge that is generally applicable in respect of employer contributions to registered schemes made on their behalf by having the employer contribute to an EFRBS.

In addition, if an employee has, or is likely by retirement to have, benefits that exceed the lifetime allowance, an unfunded EFRBS may be a viable option for providing retirement benefits in excess of the lifetime allowance. The rate of tax payable on benefits paid under the EFRBS (currently 40% and rising to 50% for the 2010/11 year) is less than the penal 55% tax that is payable on lump sums in excess of the lifetime allowance payable from a registered scheme.


An EFRBS can provide a viable means by which an employer can motivate key high earners in its business, or make tax-efficient loans to itself or its employees, without incurring any NICs on its contributions. High earners can receive their incentives or rewards on retirement while avoiding the 30% pension input tax charge that they face in respect of contributions to registered pension schemes. Given the savings that can be made through this form of pension scheme it is unsurprising that the EFRBS is becoming an increasingly popular option for the provision of benefits for high earners.

Corporate and commercial | 01 March 2010

The world of tax is quite interesting at the moment – to me, at least – because it brings into sharp focus the way that tax is used as an instrument of policy and what role it is playing in the field of social policy. It is hardly news that the state of public finances in most western economies is, to be charitable, delicate. No doubt the finances will be redressed, to an extent, by cuts in spending. However, it is equally clear that some of the improvement will have to come from an increase in public revenues. [Continue Reading]

Corporate and commercial | 01 February 2010

A consultation document, ‘Disclosure of Tax Avoidance Schemes’ (the consultation document), has beenpublished in respect of proposed changes to the disclosure of tax avoidance schemes (DOTAS) regime, which are largely aimed at improving compliance and widening the scope of the types of transactions that are disclosable. It is clear that HMRC consider this legislation to be extremely effective in countering and reducing tax avoidance, and consequently they would like to improve and develop the disclosure regime by broadening its application. This article will briefly review the current DOTAS rules and consider whether the proposed new rules are likely to have a positive impact on tax recovery and mitigating tax avoidance. [Continue Reading]

Corporate and commercial | 01 December 2009

In Airtours Holiday Transport Ltd v HM Revenue & Customs (HMRC) [2009], the tax chamber of the first-tier tribunal decided that Airtours Holiday Transport Ltd (Airtours) was entitled to a credit for input VAT on fees that it had paid to PricewaterhouseCoopers (PwC). HMRC argued that Airtours was merely a third-party payer and that PwC’s services had been provided to financial institutions, not to Airtours. The tribunal applied the ratio of the decision of the House of Lords in Commissioners of Customs & Excise v Redrow Group Plc [1999] and determined on the facts that the supply of accountancy services was made both to Airtours and the banks. Accordingly, Airtours was entitled to an input tax credit as it had been a recipient of a supply of services.

[Continue Reading]