Tax avoidance arrangements seeking to avoid Corporation Tax, Income Tax and National Insurance contributions by using unfunded pension arrangements.
HMRC is aware of tax avoidance arrangements used by owner managed companies and their directors. These arrangements are used to reward one or more directors for the services they provide to a company, in a way that seeks to avoid paying Income Tax and National Insurance contributions, while the company obtains Corporation Tax relief.
HMRC believes these arrangements do not work. We will seek to challenge anyone promoting or using these arrangements to make sure they pay the correct tax.
The arrangements involve a company creating an unfunded pension obligation to pay one or more of their directors a pension. This step attempts to create an expense in the company accounts to reduce the company’s profits and the amount of Corporation Tax payable.
Users of these arrangements may have to pay more than just the tax they tried to avoid as well as paying potentially considerable fees to the promoter of the arrangements. They could also be subject to interest and penalties.
HMRC believes these arrangements do not achieve the tax savings promised. HMRC will challenge anyone promoting such arrangements and investigate the tax affairs of all users.
A company that uses these arrangements is unlikely to be able to claim the Corporation Tax relief intended. This is because the expense shown in the company accounts may not align with general accepted accounting principles (GAAP). The expense may also be disallowed for other reasons.
Arrangements may involve transferring the obligation to a third party. In this case, users may find that:
- extra Income Tax and National Insurance contributions are due — this could be from the company and company directors on the amount due to the third party
- other tax charges may also arise
HMRC say that they will pursue anyone who designs, promotes, sells or otherwise enables others to use these arrangements.
This includes charging an enabler’s penalty on those who enable the use of abusive tax avoidance arrangements, which are later defeated by HMRC. The penalty will be equal to the fees received by the enabler for enabling the arrangements.
PAYadvice.UK 26/11/2025