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Here you can access relevant source documents which support the summaries of key tax developments in Ireland, the UK and internationally

Source documents include:

  • Chartered Accountants Ireland’s representations and submissions
  • published documents by the Irish Revenue, UK HMRC, EU Commission and OECD
  • other government documents

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The Tax and NI Treatment of Inducement Payments to Pension Scheme Members

Employers: The Tax and National Insurance Treatment of Employer Cash Inducement Payments to Pension Scheme Members

Some employers have offered or are offering inducements or incentives (inducement payments) to members of defined benefit occupational pension schemes to agree to a reduction in their benefits or to a transfer out of the defined benefit scheme to a defined contribution scheme. The inducement can occur in a number of ways, for example:

  • an enhancement to a transfer value of the pension fund; or
  • a direct cash payment to the member; or
  • a combination of those.

HMRC has been asked for advice by a number of different employers on the taxation and National Insurance (NI) position of inducement payments. Previous advice has been that the tax treatment of payments in this complex area depends on the facts of the case and that, in certain circumstances, inducement payments could be paid without income tax or NI liability.

Further legal advice in fact means that such inducement payments paid to encourage pension scheme members to give up future pension rights or to move from one pension scheme to another must be subject to income tax and national insurance contributions. Specifically they will be:

  • taxable as employment income under Section 394 ITEPA; and
  • “earnings” within the meaning of section 3(1)(a) of the Social Security Contributions & Benefits Act 1992 and liable for Class 1 NICs, under section 6(1) of that Act.

This treatment does not apply to inducement payments that enhance the transfer value of the pension fund and which are included in the funds transferred between schemes. Such inducement payments are treated for tax and NI purposes in the same way as any employer's contribution to a registered pension scheme.

This note sets out the taxation and NI position in advance of guidance that will be published in the Employment Income Manual (EIM) and the National Insurance Manual (NIM) respectively.

Transactions already entered into

HMRC are aware that transactions have been entered into which relied on previous advice that they were not taxable or liable for NICs. HMRC will not seek to alter this treatment where transactions have been carried out or where offers have been made to scheme members as follows:

  • where inducement payments have already been paid before the date of this announcement.

HMRC will not seek to tax or apply NI to the inducement payment. This assurance applies only to the extent that the payments were not taxable or apply NI to under the former view of the law. If in any particular transaction it was assumed by the payer or confirmed by HMRC that the payments were taxable or liable for NICs then that treatment will continue to apply.

  • where HMRC has confirmed that the inducement payments in point are not taxable or liable for NICs and the employer has made an offer to scheme members before the date of this announcement but no inducement payments have yet been made.

Subject to there being no material changes to the original offer, HMRC will not seek to tax or apply NICs to the inducement payments paid in relation to that transaction after the date of this announcement. This assurance applies only to the extent that the payments were not taxable or liable to NICs under the former view of the law.

  • where an employer has made an offer to scheme members before the date of this announcement and can show that they relied on HMRC's former view of the law.

HMRC will not seek to tax or apply NICs to inducement payments paid after the date of this announcement. This assurance applies only to the extent that the payments were not taxable or liable to NI under the former view of the law.

  • where an employer has made an offer to scheme members before the date of this announcement but is unable to demonstrate that it relied on HMRC's former view of the law.

HMRC will apply its revised understanding of the correct tax and NI treatment of the inducement payments and expects them to be taxed under PAYE and NI to apply.

  • where an employer has not made an offer to scheme members before the date of this announcement.

HMRC will apply its revised understanding of the correct tax and NI treatment of the inducement payments and expect them to be taxed under PAYE and NI to apply.