Disguised remuneration: tax avoidance using unfunded pension arrangements (Spotlight 58)
Find information on tax avoidance arrangements seeking to avoid Corporation Tax, Income Tax and National Insurance contributions by using unfunded pension arrangements.
HMRC is aware of tax avoidance arrangements used by owner managed companies and their directors. These arrangements are used to reward a director for the services they provide to a company, in a way that seeks to avoid paying Income Tax and National Insurance contributions, while the company obtains Corporation Tax relief.
HMRC believes these arrangements do not work. We will seek to challenge anyone promoting or using these arrangements to make sure they pay the correct tax.
The arrangements involve a company creating an unfunded pension obligation to pay one or more of their directors a pension. This step attempts to create an expense in the company accounts to reduce the company’s profits and the amount of Corporation Tax payable.
Users of these arrangements may pay considerable fees to use them. Yet, could still have to repay the tax claimed to be avoided, as well as interest and a penalty.
How the arrangements claim to work
The company enters into an agreement with its director to give that director the rights to receive a pension from the company in the future. However, due to the structure of the arrangements, HMRC believes the director will never receive a pension payment. The company then claims a Corporation Tax deduction equal to the current value of the total future pension to be paid to the director.
Many arrangements may involve further steps, such as one considered by the General Anti-Abuse Rule (GAAR) Advisory Panel. The GAAR is an independent advisory panel which approves HMRC’s General Anti Abuse Rule (GAAR) guidance. They provide opinions on cases where HMRC considers the GAAR may apply.
The further step considered by GAAR is where the company transfers its obligation to pay the director a pension in the future to a third party. The third party is often a relative of the director or another director of the same company.
The company agrees to make a payment to that third party, so the third party, instead of the company, agree to pay the director a pension. This payment may be made to the third party, or the third party can ask for a payment to be made to the director instead.
These arrangements claim to result in the director, or a third party linked to the director, receiving funds from the company. The funds have no immediate liability to Income Tax and National Insurance contributions.
Regardless of the tax effect, these arrangements often result in unusual outcomes. For example, a spouse agreeing to pay their partner a pension without receiving anything in return.
The GAAR Advisory Panel has given its opinion on a set of arrangements by which a company rewarded its director through an unfunded pension obligation. The company and the director claimed there is no liability to Income Tax or National Insurance contributions, but had also:
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transferred the obligation to pay the pension to their spouse in return for a payment to the director’s loan account
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claimed a Corporation Tax deduction
The GAAR Advisory Panel opinion on the arrangements it considered is that it is not a reasonable course of action either to enter into, or carry out, these tax arrangements.
What will happen to those who use these arrangements
HMRC strongly believes these arrangements do not achieve the tax savings promised. HMRC will challenge anyone promoting such arrangements and investigate the tax affairs of all users.
A company that uses these arrangements is unlikely to be able to claim the Corporation Tax relief intended. This is because the expense shown in the company accounts may not align with general accepted accounting principles (GAAP). The expense may also be disallowed for other reasons.
Arrangements may involve transferring the obligation to a third party. In this case, users may find that:
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extra Income Tax and National Insurance contributions are due — this could be from the company and company directors on the amount due to the third party
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other tax charges may also arise — they may be charged a penalty for submitting an inaccurate tax return to HMRC
Users of these arrangements may be charged a penalty for submitting an inaccurate tax to return to HMRC. This penalty would be because of carelessness, unless they can show HMRC they took reasonable care for tax returns sent to HMRC after 15 November 2017 relating to a tax period both:
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beginning after 5 April 2017
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ending after 15 November 2017
In deciding whether to counteract your arrangements, HMRC may refer to the opinion already given by the GAAR Advisory Panel. In this case, both of the following needs to be true:
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you have used arrangements that in substance operate in the same way as those already considered by the GAAR Advisory Panel
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the arrangements were entered into on or after 17 July 2013
You may also receive an accelerated payment notice if you receive a GAAR counteraction notice. This means you will have to pay the disputed tax upfront while HMRC continues its investigations. There is no right of appeal against an accelerated payment notice, but taxpayers can make representations.
Where the GAAR applies and the arrangements were entered into after 14 September 2016, users may be subject to a 60% GAAR penalty.
This Spotlight 58 covers arrangements that operate in substantially the same way as those considered by the GAAR Advisory Panel, as well as similar arrangements. HMRC will consider whether the GAAR might apply to such arrangements. A new opinion would need to be obtained from the GAAR Advisory Panel before HMRC could counteract the arrangements under the GAAR.
What this means for promoters
We will pursue anyone who designs, promotes, sells or otherwise enables others to use these arrangements.
This includes charging an enabler’s penalty on those who enable the use of abusive tax avoidance arrangements, which are later defeated by HMRC. The penalty will be equal to the fees received by the enabler for enabling the arrangements.
This penalty applies where any of these arrangements have been enabled and entered into on or after 16 November 2017.
HMRC will also use its powers under the promoters of tax avoidance schemes regime against those who promote tax avoidance schemes.
Scheme promoters should carefully consider the disclosure of tax avoidance schemes (DOTAS) legislation to decide if the arrangements they are marketing should be declared to HMRC.
What to do if you’re using this or similar arrangements
We want to help people steer clear of tax avoidance by asking them to stop, challenge and protect themselves, and others.
If you’re worried about becoming involved in a tax avoidance scheme, or think you’re already involved and want to get out of one, HMRC is here to help. We offer a wide range of support to help get you back on track or avoid being caught out in the first place.
If you do not have an HMRC contact and you want to get out of this or similar arrangements you can contact HMRC about getting out of this or similar arrangements.
If you’re using this or similar schemes or arrangements, we strongly advise you to withdraw from it and settle your tax affairs to prevent building up a large tax bill.
If you’re facing difficulty in making a tax payment you should ask us about affordable monthly payment options. We’ll always try to work with you to set up a time to pay arrangement based on your income and expenditure.
Time to pay arrangements are based on an individual’s specific financial circumstances, so there is no ‘standard’ time to pay arrangement. We look at what you can afford to pay and then use that to work out how much time you need to pay and over what time period.
By withdrawing from the arrangements and settling your tax affairs, you’ll:
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avoid the costs of investigation and litigation
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minimise interest and penalty charges (where they apply) on tax you should have paid
If you’re already speaking to someone in HMRC about your use of an avoidance scheme, you should contact them to discuss this further.
If you do not have an HMRC contact and you want to get out of this, or similar arrangements, you can contact HMRC about getting out of this or similar arrangements.
Get more information or report a scheme
You can contact HMRC to report tax avoidance arrangements, schemes and the person offering you the scheme. You can do this anonymously and do not have to give your name, address or your email.
Updates to this page
Last updated 28 November 2023 + show all updates
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The first paragraph has been updated from 'while the director obtains Corporation Tax relief' to 'while the company obtains Corporation Tax relief'.
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Updated the section ‘How the arrangements claim to work’ to include the definition of the GAAR Advisory Panel and their opinion on a certain set of tax avoidance arrangements. Adjusted the section 'What will happen to those who use these arrangements' with conditions for countering arrangements. Amended 'Get more information or report a scheme' with links to contact HMRC for support with arrangements.
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In the section 'Get more information or report a scheme', the way to report tax avoidance arrangements and schemes has been updated.
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First published.