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HMRC has published clarification of the status of payments or incentives that are being offered by some employers to members of defined benefit occupational pension schemes to induce them to agree to a reduction in their benefits or to a transfer out of the defined benefit scheme to a defined contribution scheme.
The inducement can occur in a number of ways, for example:
- an enhancement to a transfer value of the pension fun
- a direct cash payment to the member
- a combination of those.
Previously, HMRC's advice has been that the tax treatment of payments in this complex area depends on the facts of the case and that, in certain circumstances, inducement payments could be paid without income tax or NICs liability.
Having obtained further legal advice, the position is now that such inducement payments, paid to encourage pension scheme members to give up future pension rights or to move from one pension scheme to another, must be subject to income tax and NICs. Specifically they will be:
- taxable as employment income under the provisions in the Income Tax (Earnings and Pensions) Act 2003 for benefits provided from employer-financed retirement benefits schemes, and
- "earnings" liable for Class 1 NICs under the provisions of the Social Security Contributions & Benefits Act 1992 for remuneration or profit derived from an employment.
This treatment does not apply to inducement payments that enhance the transfer value of the pension fund and which are included in the funds transferred between schemes. Such inducement payments are treated for tax and NI purposes in the same way as any employer's contribution to a registered pension scheme.
As some transactions have already been entered into which relied on previous advice that they were not taxable or liable for NICs, HMRC will not seek to alter this treatment where
- inducement payments have already been paid before 24 January 2007, the date of the announcement. If in any particular transaction it was assumed by the payer or confirmed by HMRC that the payments were taxable or liable for NICs then that treatment will continue to apply.
- HMRC has confirmed that the inducement payments in question are not taxable or liable for NICs and the employer has made an offer to scheme members before 24 January 2007 but no inducement payments have yet been made. Subject to there being no material changes to the original offer, HMRC will not seek to tax or apply NICs to the inducement payments paid in relation to that transaction after the date of this announcement.
- an employer has made an offer to scheme members before 24 January 2007 and can show that the offer relied on HMRC's former view of the law.
These assurances apply only to the extent that the payments were not taxable or liable to NICs under the former view of the law.
However, where an employer
- has made an offer to scheme members before 24 January 2007 but is unable to demonstrate that the offer relied on HMRC's former view of the law, or
- has not made an offer to scheme members before the date of this announcement,
HMRC will apply its revised understanding of the correct tax and NI treatment of the inducement payments and expects them to be subject to PAYE tax and NICs.
This guidance will be published in due course in HMRC's Employment Income Manual (EIM) and the National Insurance Manual (NIM).
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Further information:
The Tax and National Insurance Treatment of Employer Cash Inducement Payments to Pension Scheme Members
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