Understanding EFRBS and the 2019 loan charge 

Employer Financed Retirement Benefits Schemes (EFRBS) are pension schemes that provide retirement benefits to their members but operate as unregistered schemes. Unlike regulated schemes, such as those that qualify for tax advantages, EFRBS does not allow the limited company to claim corporation tax relief on contributions, and any income and gains are not exempt from tax. However, contributions to this type of scheme are not subject to income tax or National Insurance Contributions (NICs), and the company is not required to pay the employer’s NICs.

Furthermore, EFRBS is not bound by the annual/lifetime limits that apply to registered schemes. There are no restrictions on the types of assets in which funds can be invested.

Originally designed to enable employees to boost their pension savings, especially if they had reached the ‘earnings cap’ on their registered scheme, Employer Financed Retirement Benefits Schemes (EFRBS) also attracted interest from employees residing overseas or planning retirement abroad due to their flexibility, as they can be established either in the UK or offshore.

However, HMRC is currently scrutinising these schemes, along with others like Employee Benefit Trusts (EBTs) and Funded Unapproved Retirement Benefit Schemes (FURBS), which they categorise as forms of ‘disguised remuneration.’


How does an EFRBS work?

A discretionary trust serves as the framework for this pension scheme type, known as Employer Financed Retirement Benefits Schemes (EFRBS). With an EFRBS pension, there is a commitment to provide employees and their families with remuneration during retirement, but unlike a registered pension scheme, the employer doesn’t pre-fund it.

Employees contribute regularly to the scheme, and the funds are invested without the same restrictions. Sub-trusts distribute the funds to individual members, often subject to a lower tax rate than the standard rate, and without National Insurance contributions.

Upon the payout of benefits, typically at the employee’s retirement, an interest-free loan is issued, without a specified end date, meaning it is only repaid upon the individual’s death from their estate.


What are the main benefits of an EFRBS?

An EFRBS provides various advantages, including:

  1. Flexibility: It serves as an alternative platform for retirement savings, providing more freedom in terms of fund investments.
  1. Additional Savings: Employees can save beyond their annual and lifetime allowances, without facing the same constraints as with a registered pension scheme.
  1. Retirement Abroad: Particularly beneficial for employees working abroad or contemplating retirement outside the UK, an offshore EFRBS offers a convenient avenue for saving for retirement.


EFRBS structure targeted by HMRC

The government considers Employer Financed Retirement Benefits Schemes (EFRBS) as disguised remuneration schemes. In response to potential tax avoidance, the Finance (No 2) Bill 2017 introduced measures known as the 2019 loan charge. This initiative allowed HMRC to review loans dating back to 1999 and request repayment or arrangement of appropriate PAYE and NICs.

Under the 2019 loan charge, individuals who had utilised or were still using such schemes were given a three-year period (following the 2016 Budget) to either repay outstanding loans or reach a settlement agreement with HMRC. The settlement agreement often did not alter the amount of unpaid tax but provided a way to clear the debt over several years through a payment plan.

The settlement opportunity period concluded on April 5, 2019, and the 2019 loan charge took effect. Any outstanding loans not covered by a settlement agreement would be taxed as income for the 2018/19 tax year, with the tax due by the end of January 2020.

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The importance of professional advice

The implementation of the 2019 loan charge has resulted in individuals facing the challenge of repaying substantial sums to HMRC, covering up to 20 years’ worth of loans. The financial burden may be overwhelming, and individuals might be considering various options, including the possibility of bankruptcy or alternative formal personal insolvency procedures. 

If you are grappling with a significant tax bill arising from outstanding Employer Financed Retirement Benefit Schemes (EFRBS) loans and are concerned about your ability to meet the payment obligations, seeking professional advice from insolvency practitioners like Vanguard Insolvency could provide assistance and guidance.

If you are considering entering into any formal insolvency arrangement, it is crucial to make well-informed decisions that align with your current challenges and future plans. Seeking expert advice is essential to assess your situation comprehensively, considering both personal implications and any impact on a limited company you may have.

Vanguard Insolvency’s team of licensed insolvency practitioners is available to provide the expert help and advice you need during this potentially stressful time. They can arrange a same-day consultation free of charge to discuss your specific needs and guide you through the process. Contact their team for immediate assistance and guidance.

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.