Inducement to accept changes to pension scheme judged not to be earnings from employment

In the case of E.ONUK plc v HMRC [2022] UKUT 196 (TCC) the Upper Tribunal (UT) determined that certain payments made to employees, to facilitate a change in the company’s defined benefit pension scheme, were not payments from employment and therefore not taxable as earnings.

The company operated a defined benefit pension scheme which was very expensive for the employer. In seeking to make the scheme more affordable for the company and sustainable in the longer term, the terms of the scheme were renegotiated, such that a higher contribution would be required from employees in the future if they were to maintain the same level of pension.

As part of the agreement, a package of measures was agreed which included a one-off payment to members of the pension scheme. The company argued this payment was compensation for loss of pension rights rather than a payment arising from the employment, and therefore not taxable as earnings, whilst HMRC sought tax and National Insurance contributions on the payments contending that the payments were in fact earnings from employment.

Although the payment was part of a package, the UT agreed with the company that the tax treatment of the payment did not have to follow that of other elements of the package – as this specific payment was clearly from ‘something else’ and not from ‘the employment’.

In many such cases the correct tax treatment may not be in doubt – but where the payment is not clearly a reward for services it may not be so clear cut. This decision, which followed a full analysis by the Tribunal of an abundance of case law in this area, demonstrates that, in all cases, it is necessary to look closely at the specific reasons for payments as all may not be what it first seems.