Enter Your E-mail

HMRC have recently become aware that some employers have been offering incentives to certain pension scheme members in return for agreement to either a reduction in receivable benefits, or a transfer out of the defined benefits scheme to a defined contribution scheme.

The types of inducements most commonly being offered are enhancement to a transfer value of the pension fund, direct cash payments, or a combination of both.

Historically, the tax and NI treatment of such incentive payments has depended on the facts of the case and, in certain circumstances, inducement payments could be paid tax and NIC free. However, HMRC have taken further legal advice in this area and have recently confirmed that 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 national insurance contributions.

For income tax purposes the payment will be taxable as employment income under ITEPA 2003, s. 394.

For NIC purposes, the payment will be “earnings” within the meaning of SSCBA 1992, s. 3(1)(a) and liable for Class 1 NICs, under s. 6(1).
 
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.

Where transactions have already been entered into which relied on previous advice that they were not taxable or liable for NICs, HMRC have confirmed that they will not seek to alter the treatment where the transactions have been carried out or where offers have been made to scheme members as follows:

Where inducement payments have already been paid before the date of this announcement - HMRC will not seek to tax or apply NI to the inducement payment. This assurance applies only to the extent that the payments were not taxable or apply NI to under the former view of the law. 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.

Where HMRC has confirmed that the inducement payments in point 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. This assurance applies only to the extent that the payments were not taxable or liable to NICs under the former view of the law.

Where an employer has made an offer to scheme members before 24 January 2007 and can show that they relied on HMRC’s former view of the law - HMRC will not seek to tax or apply NICs to inducement payments paid after the date of this announcement. This assurance applies only to the extent that the payments were not taxable or liable to NI under the former view of the law.

Where an employer has made an offer to scheme members before 24 January 2007 but is unable to demonstrate that it relied on HMRC’s former view of the law - HMRC will apply its revised understanding of the correct tax and NI treatment of the inducement payments and expects them to be taxed under PAYE and NI to apply.

Where an employer has not made an offer to scheme members before 24 January 2007 - HMRC will apply its revised understanding of the correct tax and NI treatment of the inducement payments and expect them to be taxed under PAYE and NI to apply.

HMRC: Tax and NIC treatment of employer cash inducement payments to pension scheme members