Employer financed retirement benefit schemes (EFRBS)

An employer financed retirement benefits scheme (EFRBS) is any arrangement that provides lump sums or other benefits on an employee’s retirement or death without being a registered pension scheme. The employer gets no corporation tax deduction when it pays in or makes a provision; relief comes only when a taxable benefit is paid or a disguised remuneration charge arises. Benefits are taxed as employment income or pension income when received, and funded schemes can trigger an earlier charge under Part 7A ITEPA 2003.

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What is an EFRBS?

Section 393A ITEPA 2003 defines an EFRBS as a scheme that consists of or includes relevant benefits. HMRC’s Employment Income Manual at EIM15020 stresses that “scheme” includes any deed, agreement, series of agreements or other arrangements, and need not be a formal document, so an informal promise of a retirement lump sum can amount to a scheme.

Registered pension schemes enjoy tax free investment growth, relief on contributions and tax free lump sums within limits. EIM15010 explains that most of those advantages fall away if a scheme is not registered, and that since 6 April 2006 such schemes have been called EFRBS. Before that date they were funded or unfunded unapproved schemes, known as FURBS and UURBS, and older schemes may have transitional rules.

HMRC’s Business Income Manual at BIM46140 distinguishes two forms. In a funded scheme the employer pays money into a separate arrangement, usually a trust. In an unfunded scheme the employer makes an accounting provision and pays the benefit itself when the employee retires.

Which benefits count, and which are excluded?

EIM15021 lists relevant benefits as any lump sum, gratuity or other benefit, including a non cash benefit, provided on or in anticipation of retirement, on death, after retirement or death in connection with past service, on a change in the nature of the employee’s service, or under a pension sharing order. Pension income taxed under Part 9 ITEPA 2003 is not a relevant benefit.

Some benefits that would otherwise qualify are excluded, including benefits for ill health or disablement during service, benefits on accidental death in service and benefits under a relevant life policy. Regulations also exclude several items employers continue to give former employees, such as trivial benefits from 6 April 2016 and annual health screening. That is why death in service cover written through an excepted group life policy or a relevant life policy is not taxed under the EFRBS rules.

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Is the employee taxed when the employer pays in?

Not under the EFRBS rules themselves. The old charge in section 386 ITEPA 2003, which taxed employer contributions to unapproved schemes as the employee’s income, was repealed from 6 April 2006 (EIM15060).

The disguised remuneration rules in Part 7A ITEPA 2003 changed the position from 6 April 2011. EIM15060 says that where an employer contributes to an EFRBS that is a third party arrangement, a charge arises when the contribution is earmarked for the employee, which can happen straight away, and PAYE must then be operated. EIM15010 adds that earmarking can be informal and that a great many funded EFRBS now fall within Part 7A. An unfunded scheme where the employer simply pays the benefit from its own funds usually involves no third party and stays under the EFRBS rules. See the loan charge and disguised remuneration.

For National Insurance, an employer’s payment into an EFRBS is disregarded in calculating Class 1 earnings (NIM02757).

When does the employer get corporation tax relief?

BIM46140 sets out the rule for both forms. The employer adds back the expense in its tax computation. Relief is given only when the former employee receives a qualifying benefit that is taxable, or would be if they were UK resident, or when a disguised remuneration charge arises. For an unfunded scheme, the benefit is deducted in the period in which it is paid.

For funded schemes the employee benefit contribution rules in section 1290 CTA 2009 apply, as they do to employee benefit trusts. For contributions made on or after 1 April 2017 for corporation tax, BIM44571 explains that a deduction is only allowed if qualifying benefits are provided out of the contribution within 5 years of the end of the period in which it was made, and, where the benefits give rise to both tax and National Insurance, that tax and National Insurance are paid within 12 months of the end of the period in which the deduction would otherwise be due. Missing these conditions can deny relief permanently. Our guide to employee benefit trusts covers the same rules.

How are benefits taxed when paid out?

Section 394 ITEPA 2003 charges a relevant benefit received from an EFRBS as employment income of the recipient (EIM15015). A pension is taxed instead as pension income under Part 9. Where the benefit comes from a third party scheme and has already been taxed under Part 7A, it is not taxed again under section 394.

Points from EIM15015, EIM15055 and EIM15120:

If total benefits received from an EFRBS in a tax year are £100 or less there is no charge; if they exceed £100, the whole amount is taxed.
Contributions the employee made, and certain employer contributions taxed before 6 April 2006, can reduce the charge.
A non cash benefit is valued at the greater of its money’s worth and its cash equivalent under the benefits code.
If the recipient is not an individual, such as a company, the responsible person is charged at 45%.
The normal residence rules for employment income do not apply, although double tax treaty relief may be available to a non resident.

The payer must operate PAYE on a lump sum chargeable under section 394. Non cash benefits are generally collected through Self Assessment unless they are readily convertible assets (EIM15210). Payments out of an EFRBS can be disregarded for Class 1 National Insurance if they would have been authorised payments had the scheme been registered and are made after the employment has ended (NIM02765).

What must be reported to HMRC?

EIM15200 sets two deadlines for the responsible person. By 31 January after the end of the tax year in which the scheme comes into operation, HMRC needs the scheme name, the responsible person’s address and the start date. A scheme comes into operation when the employer first contributes or a relevant benefit is first provided. Then, by 7 July after the end of any tax year in which a relevant benefit is provided, HMRC needs each recipient’s name, address and National Insurance number and the nature and amount of the benefit.

Does inheritance tax apply?

A funded EFRBS held in trust is a relevant property trust. HMRC’s Inheritance Tax Manual at IHTM17082 says an entry charge is unlikely because most employers are not close companies, and even for a close company business relief is likely to be available. The ten year anniversary charge is the most likely charge given how long these schemes last, and exit charges arise when property leaves the trust unless the scheme pays a pension or annuity. See the trust ten year charge.

How does this work in practice?

Illustration only. A company promises its finance director a £60,000 lump sum when she retires, with no fund set aside.

Years 1 to 5: the company charges £12,000 a year to its accounts as a provision. Each year it adds the charge back for corporation tax.
Year 6: she retires and the company pays her £60,000. The company operates PAYE and the payment is her employment income under section 394. The company deducts £60,000 in that year’s computation.

Had the company paid £60,000 into a trust earmarked for her, Part 7A would probably have taxed her when the money was earmarked, and the company’s deduction would depend on the 5 year and 12 month conditions.

What mistakes come up most often?

Claiming the accounting provision as a deduction in the year it is made.
Assuming a funded EFRBS defers tax for the employee. Since 2011, earmarking usually triggers Part 7A.
Missing the 31 January commencement and 7 July annual reports.
Forgetting that an informal promise can create a scheme.
Ignoring ten year charges on funded trusts.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.