The government has confirmed that legislation will be introduced in the Finance Bill 2011 to tackle arrangements that use trusts and other vehicles to reward employees, which seek to avoid, defer or reduce tax liabilities.
The legislation will ensure an income tax charge arises where a third party makes provision for a reward, recognition or loan in connection with an employee’s employment. This will include employer-financed retirement benefit schemes (EFRBS).
This will be based on:
- a sum of money made available;
- on the higher of the cost or market value where an asset is used to deliver reward or recognition.
Employers will also be required to account for PAYE accordingly because the amounts concerned will count as a payment of employment income.
The legislation will take effect from 6 April 2011 and will apply to rewards which are earmarked for, or made available to, an employee on or after that date.
Anti-forestalling rules will apply to the payment of sums and provision of readily-available assets awarded between 9 December 2010 and 5 April 2011, where these would be caught by the legislation if provided on or after 6 April 2011.
Nicola Plant, partner at law firm Thomas Eggar, said: “Since the initial caps on pension contributions were announced, some high earners have opted to sacrifice part of their salary and make additional savings into an EFRB. Until now, provided there was a genuine and effective salary sacrifice on the part of the employee, contributions into EFRBS would not attract income tax or national insurance contributions. This was, therefore, a favourable top-up option to both employee and employers.
“The legislation announced today makes some EFRBS less attractive. However, company schemes that have been genuinely set up to provide retirement benefits to employees remain intact.
“The legislation brings EFRBS more into line with approved schemes, but does not prevent high earners from†undertaking additional retirement planning. The changes will principally affect only the highest earners looking for ways to extract funds immediately, without paying tax.”
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