Christmas bonuses and other ex-gratia payments
Despite media (and perhaps even public) perception that employers care progressively less about their employees, plenty of employers still provide Christmas bonuses and other perks, and not only to their current employees but often also to former employees receiving a pension under the company’s scheme.
Where an ex-gratia payment is paid to pensioners, it is often thought of as being a pension scheme benefit. But is it really, and if so, should it be?
Pre-6 April 2006 (A Day)
Pre A Day, ex-gratia payments (other than genuine compensation for loss of office or redundancy) were treated as being paid from a retirement benefits scheme and were taxable as benefits under an approved or unapproved scheme (as appropriate).
- Ex-gratia payments made in cash could be made from an approved scheme as they were “relevant benefits”.
- Benefits-in-kind (for example, hampers) were considered as being provided from an unapproved scheme and would be taxable accordingly.
On top of this, tax approved pension schemes could not, in HMRC’s view, make provision for one-off payments. Bonuses to pensioners could therefore only be paid from an approved scheme if (a) Revenue limits were not breached and (b) the employer was committed to paying the increase every year.
After A Day, payments from pension schemes are divided into “authorised” and “unauthorised” payments. Unauthorised payments give rise to additional tax charges and the possible risk of de-registration, so are best avoided!
The FA04 makes no provision for payments to members other than pension, lump sums and in limited circumstances, refunds of contributions. Gifts in kind are not provided for, so hampers still cannot be provided by a tax-advantaged scheme.
The only category of authorised payment that a bonus would fall into would be an additional amount of pension. Reducing a pension generally renders it unauthorised, meaning that, just as before A Day, this sort of payment should only be made through a pension scheme if the intention is to pay it every year.
In reality, most such arrangements will in fact be payments from the employer using the pensions payroll as a distribution method. However, if a scheme has moved away from this and is providing the bonus as a scheme benefit, both employer and trustees need to be aware that stopping the practice will be problematic and would result in the bonus being unauthorised.