Defined Benefit Schemes

Defined Benefit schemes have taken a hefty knock in recent years. These schemes, otherwise known as Final Salary Schemes, promise an employee a set percentage of their salary on retirement. Usually calculated in 60ths or 80ths the percentage is often based on the number of years in which the employee worked for the company.

Once offered freely by larger organisations, Defined Benefit schemes have fallen out of favour due to a combination of changes in tax treatment and the fall in stock market values leading to shortfalls in fund valuations. Now, a case being referred to the European Court may offer a ray of hope to scheme trustees. The case revolves around the question of whether Defined Benefit schemes should pay VAT on investment management services. The case was originally heard by the UK tax tribunal which in February of this year agreed to refer it on to the European Court.

If successful, Defined Benefits schemes would be able to save some £100 million per year in VAT as well as being able to claim back VAT paid over an agreed backdated period. On the other side of the coin, an HMRC consultation period into Employer Asset Backed Pension Contributions has just closed. This consultation was aimed at limiting the way that unintended tax relief can arise from the way in which contributions are structured. HMRC wished to “ensure that the amount of tax relief given to employers accurately reflects the value of the contributions received by pension schemes, while preserving flexibility for both employers and pension schemes to use these arrangements to manage pension deficits.”

Essentially using asset backed contributions means that businesses can use non-cash assets as a guarantor of future regular payments into a scheme. This enables shortfalls in a scheme to be made good over a longer period than otherwise, helping the business to manage its cash flow. Subject to the results of the consultation some businesses may need to look anew at their funding arrangements.

As tax mitigation specialists Newshams are able to give advice on how tax may affect any private or business transaction including pension funding and how to put in place an effective mitigation strategy.

Contact us now on 020 7470 8820 and ask to speak to a tax adviser about how we can reduce your tax costs or e-mail us at and we’ll get straight back to you.
08 September 2011

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