Payments to funded unapproved retirement benefit schemes attract NI contributions as earnings, court says

By a majority decision the Court of Appeal overturned the Upper Tribunal and said that discretionary, non-contractual contributions to a discretionary trust for an employee's benefit falls within the scope of the national insurance regime. Contractual contributions to FURBS were held subject to NICs in 2007.

FURBS were introduced to provide additional benefits for pension scheme members who earned more than the 'salary cap' in place between 1989 and 2006. Although contributions do not attract tax relief, there is no limit to the benefits payable by a FURBS and the entire amount accumulated before 6 April 2006 may be taken on retirement as a tax-free lump sum if required.

The pension simplification regime introduced on 6 April 2006 replaced the concept of a maximum salary for tax-approved pension benefits with a Lifetime Allowance, leading to the closure of most existing FURBS. Pension schemes outside the current regime of registered pension schemes are now called employer-financed retirement benefits schemes (EFRBS)”In this case contributions were made to the scheme for the benefit of a company director, a Mr McHugh, by way of a cash payment and transfers of Treasury stock. 

Under the scheme rules McHugh was unable to take immediate advantage of the contributions made on his behalf as the benefits were dependent on his surviving to his retirement age. The employer, Forde and McHugh, argued that this meant the contributions could not be classified as "earnings" on which NICs should be paid, relying on previous income tax cases which held that payments to a fund in which employees had only a contingent or conditional interest were not 'emoluments' for tax purposes.

Under the Social Security Contributions and Benefits Act, the term "earnings" for the purpose of calculating NICs includes "any remuneration or profit derived from employment", although the Act later goes on to rule out contributions on earnings paid into registered pension schemes. Lady Justice Arden said that the employer could not assume that the approach to national insurance and income tax should be the same since national insurance had a different origin and function. Although the contributions did not fall within the income tax regime because they were not and could not be converted to a salary, fee or wage, McHugh was still better off after they were paid into the scheme than he was before.

The true interpretation of the expression "paid to or for the benefit of an earner" included in the Act caught, she said, "any payments which constitute remuneration or profit derived from an employment and which meet the further condition that they are either paid direct to the employee or paid to a third party for his benefit" - such as to the trust, for the benefit of McHugh, in this case.

"The words 'earnings paid to or for the benefit of the earner' have to be applied as they stand," she said. "The word 'paid' means 'paid' and not 'received'. It is, therefore, irrelevant for the triggering of the liability to pay [NICs] that the payment is actually vested."

The company must now decide whether to appeal to the Supreme Court.