The change in practice whereby employer contributions into funded unapproved retirement benefit schemes (FURBS) have become liable to national insurance contributions threatened also to affect occupational pension schemes working under interim scheme documentation, before definitive documentation can be made ready and approval sought from the Pension Schemes Office (PSO). By default, schemes awaiting PSO approval are unapproved retirement benefit schemes. As a result, the Contributions Agency announced that any employer contributions paid into schemes operating under interim documentation would give rise to both a primary Class 1 national insurance liability on the employee and also a secondary liability on the employer. Once the scheme gained approval, a refund of the national insurance contributions would have been reclaimable from the Contributions Agency.
The problem for the Contributions Agency was that for national insurance purposes, liability must be determined in the pay period in which the payment is made, so that any primary national insurance contributions can be deducted from the payment and accounted for to the Collector of Taxes by the 19th of the following month. In the view of the Contribution Agency, this pay period basis for assessing national insurance liability made it virtually impossible to match the extra-statutory practice of the Inland Revenue to allow some tax relief to schemes operating on interim documentation. To enable the employer to assess the liability for national insurance the necessary criteria for establishing liability seemed to have to be in place at that time. The Contributions Agency stated that it believed that it would be incompatible with this requirement if the regulations were to exclude payments from any national insurance contribution liability conditionally on the future approval of the scheme by the Inland Revenue.
The only solution it seemed was for the Contributions Agency to propose a power to return contributions in the light of the eventual approval by the Inland Revenue. The Contributions Agency commented: "As the Inland Revenue are able to process applications for scheme approval entered on standard scheme documents within a matter of a few days, we do not expect the need for refunds to arise very often or to create difficulties for schemes seeking approval." However, many new schemes operate for up to two years on interim documentation before they can put in place a definitive trust deed and so gain PSO approval.
If doing this period, employer contributions gave rise to a national insurance liability on both the employees and employers, there would be considerable difficulties. Not least of the difficulties would be how to apportion the employer contributions to the scheme among the employees to calculate the national insurance contributions charge. The draft regulations proposed the following method which will apply to FURBS:
" Where, pursuant to a retirement benefit scheme a sum is paid with a view to the provision of any relevant benefits in relation to more than one person, the amount of earnings which is comprised in such a payment which falls to be taken into account in the computation of each of those person's earnings shall, for the purposes of earnings-related contributions, be calculated or estimated on the basis of -
1. separate sums which would have had to have been paid to secure the separate benefits to be provided for them respectively (where those benefits are known at the time of the payment);
2. an equal part thereof (where the benefits to be provided to each of them respectively are not known at the time of the payment)."
Intense lobbying over the summer and the autumn is likely to have successfully resolved the problems for schemes awaiting approval from the PSO. The Contributions Agency has agreed in principle to meet the concerns expressed by the pensions representative bodies and is preparing revised draft regulations.
The eventual regulations will make other changes. When the change in practice regarding national insurance contributions on employer contributions to FURBS was announced it raised the question that, if employer payments into FURBS are subject to a national insurance liability because they are classifiable as earnings, employer contributions into approved schemes might also be so classified. To guard against this possibility the Contributions Agency proposed new regulations which are primarily concerned with excluding payments to schemes where the employer's payment to the scheme is not taxable on the employee under schedule E.
The exclusions will be achieved by adding to the list of payments to be disregarded at Regulation 19(l) in the Social Security (Contributions) Regulations 1979. The following exclusions have been proposed:
- payments which are not taxable on the employee under schedule E (which includes approved schemes and abandoned schemes);
- overseas schemes which, if they were based in the UK, would have an approved status;
- payments to superannuation funds approved before 6 April 1980;
- payments to the special international scheme for pilots.
The regulations will exclude from a national insurance liability any benefit paid out of an excluded scheme. Previously, regulation 19(1)(g) to the Social Security (Contributions) Regulations excluded any payment by way of a pension and therefore other payments out of a scheme had to be looked at individually with regard to the reason for payment. The Contributions Agency argued that was scope under the old regulations for uncertainty as to whether certain retirement benefits were pensions for the purposes of regulation 19(1)(g). The Agency intends that this new regulation should provide a clear and unambiguous exclusion for any payment made out of such a scheme.
For further information please contact Jane Marshall, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: + 44 171 655 1000
This article was first published in the Winter 98/99 Hammond Suddards Pensions Newsletter
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
