What non-taxable benefits can be provided for retired employees?

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From 6 April 2006, when an employer provides payments and benefits to employees who are retiring or to the family or relatives of an employee who dies in service but which are not provided from a registered pension scheme (e.g. an occupational pension scheme), the payments and benefits are treated as being provided under an Employer Financed Retirement Benefit Scheme (EFRBS).  An EFRBS is a non-registered pension scheme and any “relevant benefits” are fully taxable under the provisions of sections 393-400 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), unless they do not exceed £100 in value in the tax year.

In the context of retirement and death, the legislation defines “relevant benefits” as including any payment or non-cash benefit that is provided

(a)   on or in anticipation of the retirement of an employee or former employee,

(b)   on the death of an employee or former employee, or

(c)    after the retirement or death of an employee or former employee in connection with past service.

However, specifically excluded from the definition are any such payments or benefits that are provided from a registered pension scheme or that are “excluded benefits”.

There is a long list of “excluded benefits” and they may be split into two groups, namely

1. where the retirement or death is as a direct result of the employment, and
2. where the benefits provided after retirement were exempt from tax before retirement.

Retirement or death resulting from the employment

Benefits from an EFRBS are “excluded benefits” if they are:

• benefits in respect of ill-health or disablement of an employee during service
• benefits in respect of the death by accident of an employee during service
• benefits in respect of an employee’s non-accidental death in service and payment of which is already provided for under the rules of the scheme on 6 April 2006
• benefits under a group life policy or certain prescribed individual life policies
• benefits under the Armed Forces and Reserve Forces Compensation Scheme.

Consequently, payments and benefits that are prompted by the employee’s ill-health, disablement or death in service are not subject to an income tax charge.  The effect is that all other payments and benefits made in the event of retirement and death are taxable.  This includes taxable benefits that were provided during the employment and that continue to be provided after retirement, e.g. private medical insurance, use of a company car or other company asset, club memberships.  They are not taxable as “section 62” earnings from the employment – the person is no longer an employee – but as “section 394” employment income from an EFRBS.  If the total value of the benefit in a tax year does not exceed £100, there is no tax liability.  If the benefit is in the form of a lump sum payment, it is taxable under PAYE.  Otherwise, the total value of the benefit in a tax year is taxed under self-assessment.  See Reporting benefits provided under an EFRBS, below.

Benefits that were exempt from tax before retirement

The following benefits provided by an employer (or by someone who has taken on the responsibility for providing the benefit in place of the employer) from an EFRBS continue to be exempt from tax if they were exempt when they were being provided as an employment benefit before retirement or death in service.

The following definitions need to be understood:

Living accommodation is “similar accommodation” if, at the time the employee or member of the employee’s family starts to occupy the new accommodation, its market value does not exceed that of the accommodation occupied immediately prior to it by more than 20%.

Living accommodation is “improved property” if work has been done to improve it, other than to comply with a statutory requirement, so that its market value when the work is completed is more than 20% of what its market value would have been if the work had not been done.

The following are “members of an employee’s family”:

• the employee’s spouse or civil partner (or, as relevant, former spouse or  former civil partner),
• the employee’s children and their spouses or civil partners,
• the employee’s parents, and
• the employee’s dependants.

The “performance of an employee’s duties” refers to

• the better performance of the employment duties, or
• employment in the case of which it is customary for employers to provide living accommodation for employees.

The benefits described here are divided into four groups, according to who, in each situation, benefits from the tax exemption, namely

1. the employee
2. the member of the employee’s family
3. the employee or, in certain specified situations, a member of the employee’s family
4. the employee or, after the employee’s death, a member of the employee’s family.

1.   The employee only may benefit from the continuing tax exemption in the following two situations:

(a)   Living accommodation that continues to be provided for a former employee if

• it is not “improved property”, and
• the employee had lived there, or in “similar accommodation”, continuously for five or more years immediately prior to retirement, and
• throughout the five years, the accommodation was not taxable because it was exempt from tax (ITEPA s.99 or equivalent earlier legislation) because it was provided for the performance of the employee’s duties.

The following breaks in the occupation of the living accommodation do not affect continuity of occupation:

• any one break not exceeding six months,
• breaks not exceeding one month each,
• breaks (of any duration) resulting from the employee’s ill health.

(b)   Equipment, services and facilities that continue to be provided for a former disabled employee which, when they were first provided, were not taxable because they were exempt under the provisions of the Income Tax (Benefits in Kind) (Exemption for Employment Costs resulting from Disability) Regulations 2002.  The continuing exemption applies also to any such equipment, services and facilities that have to be replaced subsequently.

2.   A member of the employee’s family only may benefit from the continuing tax exemption in the following situation:

(a)   Living accommodation that is provided to a member of the employee’s family after the employee’s death, if it is not “improved property” and if,

• where the employee died before retirement,
  • the employee had lived there, or in “similar accommodation”, continuously for five or more years immediately prior to the employee’s death, and
  • throughout the five years, the accommodation was not taxable because it was exempt from tax (ITEPA s.99 or equivalent earlier legislation) because it was provided for the performance of the employee’s duties.
• where the employee died after retirement, the living accommodation was already exempt from tax because it met the conditions in Situation 1(a) above.

The same breaks in occupation as described in Situation 1(a) above also do not affect continuity of occupation.

3.   An employee or a member of the employee’s family may benefit from the continuing tax exemption in the following situations involving living accommodation.  A family member may only benefit if the employee dies, or takes up residence elsewhere (than in the living accommodation concerned) as a result of ill-health, or following a separation, the annulment or divorce of a marriage, or the nullity or dissolution of a civil partnership.

(a)   Living accommodation that continues to be provided by a local authority which, when the former employee worked for the local authority, was exempt from tax (ITEPA s.98) because it was provided on equivalent terms to other council tenants.

(b)   Living accommodation that continues to be provided if

• the employee had been employed as a minister of a religious denomination
  • for five or more years immediately before retirement, or
  • immediately before the employee’s death, or
  • if the employee retired immediately after a period of ill-health (substantiated by medical evidence), immediately preceding the beginning of that period, and
• at any time while the employee had been a minister, the accommodation was not taxable because it was exempt from tax (ITEPA s.99 or equivalent earlier legislation) because it was provided for the performance of the employee’s duties.

(c)    Living accommodation that continues to be provided if

• at any time before the employee’s retirement or death, the accommodation was not taxable because it was exempt from tax (ITEPA s.100 or equivalent earlier legislation) because of a security threat to the employee, and
• the security threat requiring the provision of the living accommodation is continuing even though the employment has ended.

(d)   Removal expenses and related insurance costs incurred in connection with a change of residence if

• the former residence is the living accommodation in Situations 1(a), 2(a) or 3(a) to 3(c), and
• payment by the employer of such expenses and costs would have been exempt from tax (ITEPA s.271) if it had been provided in the course of the employment and the change of residence had met the statutory conditions (ITEPA s.273).

The exemption does not apply to any amount by which the expenses and costs exceed £8,000.

(e)   Repairs and alterations to living accommodation in Situations 1(a), 2(a) or 3(a) to 3(c) if

• such repairs and alterations would have been exempt from tax (ITEPA s.313) because of being carried out on living accommodation provided by reason of the employment, and
• they do not have the effect of turning the living accommodation into improved property.

(f)     Payments or reimbursements of council tax and other property taxes in respect of living accommodation in Situations 1(a), 2(a), 3(b) or 3(c) if they would have been exempt from tax (ITEPA s.314) because the accommodation was provided for the performance of the employee’s duties or because of a security threat to the employee.

4.   An employee or a member of the employee’s family may benefit from the continuing tax exemption in respect of the following benefits.  A family member may only benefit if the employee dies.

(a)   The provision of a non-cash benefit that is not taxable because it was received in connection with the termination of the employee’s employment, and that termination took place before 6 April 1998.

(b)   The provision of welfare counselling, i.e. counselling other than advice on finance (other than on debt problems), advice on tax, or on leisure or recreation, and legal advice, which would have been exempt from tax (Income Tax (Benefits in Kind) (Exemption for Welfare Counselling) Regulations 2000) if it had been provided in the course of the employee’s employment.

(c)    The provision of sporting and recreational benefits that would have been exempt from tax (ITEPA s.261) if it had been provided in the course of the employee’s employment.

(d)   The provision of an annual party or similar annual function that would have been exempt from tax (ITEPA s.264) if it had been provided in the course of the employee’s employment.

(e)   The provision of a service for the writing of a will or similar testamentary document if the cash equivalent of the benefit (ITEPA s.203) does not exceed £150.

Reporting benefits provided under an EFRBS

Under the provisions of the Employer-Financed Retirement Benefits Schemes (Provision of Information) Regulations 2005, employers are required to notify their tax office when an EFRBS scheme starts and annually thereafter.  Notification is made by the “responsible person”, i.e.

• if there are one or more trustees resident in the UK, each of them, otherwise
• if there are one or more persons controlling the management of the scheme, each of them, otherwise
• any employer who established the scheme or their successors, provided they still exist, otherwise
• any employer of employees for whom the scheme provides benefits, otherwise
• if there are one or more trustees not resident in the UK, each of them.

By 31 January following the end of the tax year in which the scheme comes into operation, the employer must notify the tax office of

• the name of the scheme,
• the address of the person responsible for it, and
• the date the scheme came into operation.

A scheme “comes into operation” on the earlier of (1) the date on which an employer contributes to the scheme, and (2) the date on which benefits are first provided.

Every year, by 7 July following the end of the tax year in which any benefits are provided, the responsible person must notify the tax office of

• the name, address and NI number of the recipient(s) of the benefit
• the nature of the benefit
• the value of the benefit, and
• confirmation of the identity of the responsible person.

The value of a non-cash benefit is the greater of (1) its money’s worth, and (2) its cash equivalent under the Benefits Code (i.e. the value that would be reported on form P11D if the recipient were still an employee).

Form P11D should not be used to send these details to the tax office and the information should be send separately from any P11Ds, clearly marked “Employer Financed Retirement Benefit Scheme – Benefits Provided”.  There is no liability for Class 1A NICs on benefits provided under an EFRBS.

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This entry was posted on Thursday, September 16th, 2010 at 11:25 and is filed under PAYE, Pensions, retirement. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.