A refresh: Employer Financed Retirement Benefit Schemes

Companies often establish Employer Financed Retirement Benefit Schemes (EFRBS) to provide retirement benefits to senior executives. This may be the case if an executive would otherwise exceed their annual allowance for registered pension scheme savings.

Alternatively, the executive might be likely to retire outside the UK, and so a more flexible arrangement may be more appropriate to their personal circumstances. However, other arrangements that provide benefits in connection with an employee’s death, past services, or in relation to a change in the nature of their services, can also fall within the EFRBS regime – potentially without the employer being aware.

This means employers can easily overlook their EFRBS reporting obligations, particularly as these arise under a stand-alone regime outside the usual employer tax year end reporting. This article outlines what arrangements fall within the EFRBS tax regime, what reporting obligations arise, and what companies can do to confirm whether their EFRBS compliance position is up to date.

Broadly, an EFRBS is a scheme for providing a lump sum, gratuity, or other cash or non-cash benefit (other than, normally, pension payments) to or in respect of an employee or former employee, including retirement and death related benefits.

Certain pension arrangements (e.g. registered pension schemes) and benefits (most pension payments and also, for example, benefits in respect of accidental death during service) are excluded from the EFRBS regime. Also, special considerations apply to arrangements established outside the UK.

Subject to that, the scope of the EFRBS rules is very broad.

An EFRBS does not need to be formally established (e.g. as a trust) and need not be in a particular form. Additionally, in HMRC’s view, an EFRBS does not require any prior understanding between an employee and employer that relevant benefits may be provided and, for example, can be constituted by:

• A decision at an employer’s meeting;
• A decision by an employee with delegated authority or in accordance with a policy; and
• A situation where it is common for an employer to make a payment to a particular class of employees.

This means that whilst an employer is likely to recognise that a trust established to provide retirement benefits for senior executives outside a registered pension scheme is an EFRBS, it might not realise that an EFRBS could also have come into existence when, for example, providing medical benefits to a widow from the company’s own funds (and without the involvement of a trust or other intermediary).

Consequentially, employers might fail to ensure that withholding and reporting obligations that arise under the EFRBS legislation are correctly discharged. As this can potentially give rise to significant and unexpected tax liabilities, it is important that employers obtain appropriate specialist advice before taking any steps that could, potentially, create an EFRBS.

An EFRBS must be registered with HMRC on or before 31 January following the end of the tax year in which it comes into operation (so an EFRBS that came into operation during tax year 2023/24 should be registered with HMRC on or before 31 January 2025).

An EFRBS will ‘come into operation’ when the employer first makes a contribution to the scheme (e.g. where it has been established using a trust or other intermediary) or, if earlier, when ‘relevant benefits’ are first provided under the scheme (but note that pension payments, in particular, will not normally be ‘relevant benefits’).

Depending on how an EFRBS has been established and operates, the obligation to register the scheme can fall either on the scheme trustee or manager, or on the relevant employer. Additionally, if an EFRBS has been established using a trust, the trustees might be required to register the trust itself with HMRC’s Trust Registration Service.

Any relevant benefits that an individual receives from an EFRBS are normally taxable as employment income (although certain reliefs/exemptions may apply) and, if in the form of cash or readily convertible assets, are normally subject to PAYE.

In addition to any payroll withholding obligations that arise in relation to an EFRBS, the scheme trustee/manager or relevant employer (as appropriate) must send HMRC certain details of relevant benefits provided under the scheme no later than 7 July following the end of the relevant tax year.

Although, depending on how an EFRBS is established and run, the relevant reporting obligations can fall on the scheme trustee or manager rather than on the employer, the employer has a reputational interest and governance role in ensuring that EFRBS are registered on time, relevant benefits are correctly reported, and that the information provided to HMRC is complete and correct.

For 2023/24, as part of year-end reporting, employers should ensure they have identified all EFRBS that came into operation during 2023/24 in relation to their employees and former employees, and report these to HMRC on or before 31 January 2025. They should also ensure that any relevant benefits provided under their EFRBS during 2023/24 were correctly subjected to PAYE if in the form of cash or readily convertible assets, and were reported to HMRC by 7 July 2024.

There is no obligation to send statements of relevant benefits provided during a tax year to the recipients, but it is good practice to do so to assist them to comply with their self-assessment obligations.

Penalties can apply for the late registration of EFRBS and reporting of relevant benefits. Employers should therefore ensure that all EFRBS which operate in relation to their employees and former employees are registered with HMRC by the scheme trustee/manager or, as appropriate, by the employer itself, and that any relevant benefits provided are subjected to PAYE as appropriate and reported to HMRC by the relevant deadlines.

Where a failure to register an EFRBS, or to report or operate PAYE withholding on relevant benefits, is identified for an earlier year, this should be disclosed to HMRC and corrected without delay. In these circumstances, employers should also implement appropriate processes to ensure that any EFRBS that might come into existence in the future are identified so that the associated registration, withholding, and reporting obligations can be discharged on a timely basis.

For 2024/25, as we come towards the end of the tax year, and bearing in mind how broad the definition of an EFRBS can be, employers should confirm they have identified all EFRBS established during the year, as discussed above, and continue to monitor the position.

Please contact Alex Thornton, Rhys Thomas, Hayley Perkin, or your usual KPMG in the UK contact to discuss EFRBS, or how KPMG in the UK could support your EFRBS compliance, in more detail.

For further information please contact:

• Alex Thornton
• Hayley Perkin