An employee benefit trust (EBT) is a trust set up by an employer to hold cash or shares for the benefit of its employees, most often to run share schemes or an internal market in shares. The employer’s contribution is not deductible when it is paid into the trust: section 1290 CTA 2009 defers relief until the trust provides benefits that are taxed as employment income with National Insurance, and for contributions from 1 April 2017 denies relief altogether unless that happens within five years and the tax is paid on time. Payments, loans or even earmarking by the trustees can trigger the disguised remuneration charge in Part 7A ITEPA 2003.

What are employee benefit trusts used for?

HMRC’s Business Income Manual at BIM44510 lists the main uses: share related benefits under employee share schemes, pensions and other retirement benefits, accident benefits and healthcare benefits, as well as more general purposes. Trusts that hold shares for employees are often called employee share ownership trusts. BIM44515 explains that, for an unquoted company, such a trust can:

  • provide a market for employees’ shares that otherwise may not exist;
  • keep control in friendly hands and limit unwanted takeovers;
  • help with succession planning and management buy outs;
  • hold shares ready to transfer to employees when they exercise options or become entitled to awards.

An employee ownership trust is a specific kind of EBT that holds a controlling stake for the benefit of all employees, with its own capital gains and income tax reliefs. This page covers the general rules that apply to other EBTs.

When does the employer get a corporation tax deduction?

A contribution to an EBT is an employee benefit contribution. Section 1290(2) CTA 2009 allows a deduction for a period of account only so far as qualifying benefits are provided out of the contribution during that period or within nine months after its end. Any amount disallowed is allowed in the later period in which benefits are provided (section 1290(3)).

Section 1292 defines qualifying benefits. Broadly, a payment of money or transfer of assets counts if it gives rise both to an employment income tax charge and to a National Insurance charge, or would do so if the employee worked in the UK, or is made in connection with termination of employment, or is paid under an employer financed retirement benefits scheme. A loan is not a qualifying benefit in its own right, but a relevant step that triggers a Part 7A charge, which can include a loan, does count.

Finance (No. 2) Act 2017 added two further conditions for contributions made on or after 1 April 2017 for corporation tax (BIM44571):

  1. no deduction is allowed for a period of account starting more than five years after the end of the period in which the contribution was made (section 1290(1A)); and
  2. where the benefit gives rise to income tax and National Insurance, the deduction is allowed only if that tax and National Insurance are paid within 12 months after the end of the period for which the deduction would otherwise be given (sections 1290(3C) to (3E)).

Section 1290(3G) also stops employers routing ordinary pay through a trust to change the timing. If remuneration is paid and, as a result, contributions are made to an EBT, the deduction is treated as one for employee benefit contributions and follows these rules rather than the unpaid remuneration rule in section 1288 (BIM47130).

How does the timing work with numbers?

Illustration only. A company with a 31 March year end pays £100,000 into an EBT on 1 March 2027. In June 2027 the trustees fund £60,000 of bonuses that are paid through the company’s payroll with PAYE and National Insurance. The other £40,000 stays in the trust.

  • The £60,000 was provided as qualifying benefits within nine months of 31 March 2027, so it can be deducted in the year ended 31 March 2027, provided the PAYE and National Insurance on it are paid by 31 March 2028.
  • The £40,000 is not deductible for that year. It becomes deductible in whichever later period the trustees provide qualifying benefits from it.
  • If no benefits are provided before periods of account starting after 31 March 2032, the £40,000 is never deductible.

What is the disguised remuneration charge?

Part 7A ITEPA 2003, which applies from 2011 to 2012, targets arrangements that use third parties such as trusts to avoid or defer income tax on rewards. Section 554A sets the gateway: there must be an employee (or a former or prospective employee), an arrangement that is in essence a means of providing rewards, recognition or loans in connection with the employment, and a relevant step taken by a relevant third person, such as the trustees of an EBT. The relevant steps are:

  • earmarking a sum of money or asset, however informally, with a view to a later step for the employee (section 554B);
  • paying a sum, including by way of loan, or transferring an asset to the employee or a linked person (section 554C);
  • making an asset available for the employee to benefit from as if it had been transferred (section 554D).

The value of the step counts as employment income and is brought within PAYE (EIM45000). There is no general motive test; instead, Part 7A has a number of specific exclusions aimed at arrangements that are not tax avoidance, and HMRC expects each case to be checked against them. There is no statutory clearance, but HMRC will consider non statutory clearance applications (EIM45005).

The readily convertible assets rules are also relevant when an EBT transfers shares to employees, because PAYE may be due on their value. Cash paid out of the trust as a bonus is taxed in the normal way, as explained on our page on how bonuses are taxed.

What was the loan charge?

Many older EBT arrangements paid employees by loans that were never expected to be repaid. The loan charge, announced at Budget 2016, taxed disguised remuneration loan balances outstanding on 5 April 2019. After the independent review led by Sir Amyas Morse, HMRC’s guidance says the charge applies only to outstanding loans made on or after 9 December 2010; for employees, loans made between 9 December 2010 and 5 April 2019 inclusive. It does not apply to loans made in years before 2016 to 2017 where the scheme was reasonably disclosed in the return and HMRC took no action, and people affected could elect to spread the balance over 2018 to 2019, 2019 to 2020 and 2020 to 2021.

How does inheritance tax apply to an EBT?

A transfer of shares into an EBT by an individual can be exempt under section 28 IHTA 1984, and a disposition by a close company can be relieved under section 13. Section 28 requires the trust to benefit all or most of the company’s employees and office holders, and the trustees must hold more than half of the ordinary shares and have majority voting control at the date of transfer or within a year. The exemption is lost if the trust can benefit a participator holding 5% or more, or anyone connected with one.

Finance Act 2025 tightened these rules for transfers from 30 October 2024 (IHTM42902):

  • the restriction on participators and connected persons benefiting applies for the whole life of the trust;
  • an individual must have owned the shares for the two years before the transfer;
  • the carve out for income payments does not apply if more than 25% of the employees and office holders who can benefit are participators or connected with them.

BIM44500 notes that where a close company’s contribution is disallowed or deferred for corporation tax, there may also be inheritance tax consequences. Our page on close company rules explains who is a participator.

What mistakes do employers make with EBTs?

  • Deducting the contribution in the year it is paid into the trust, rather than when benefits are provided.
  • Letting trustees set up sub funds for named directors or their families, which can be earmarking under section 554B and trigger an immediate charge.
  • Lending trust money to employees or directors on the basis that a loan is not income, when a loan is a relevant step under section 554C and is taxed as employment income.
  • Forgetting that a buyback promise or internal market run by the trust can make shares readily convertible, so PAYE is due on awards.
  • Settling shares into a trust for inheritance tax purposes without checking the two year ownership condition and the 25% test.

HMRC’s guidance at BIM44500 tells its staff to consider the corporation tax deduction together with PAYE and National Insurance on payments out of the trust, so an enquiry into one usually extends to the other.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.