In E.ON UK Plc v HMRC [2022] UKUT 196, the Upper Tribunal (UT) found that payments made by an employer, as part of a package of changes for employees, were compensation for loss of pension rights and not taxable employment earnings. 

  • E.ON UK Plc (E.ON) operated various different types of Pension schemes for employees, including two categories of defined benefit schemes.
  • In order to reduce the costs associated with the defined benefit schemes, a series of changes were proposed.
    • Under the revised arrangements, employees would have to make higher Pension contributions in order to maintain the same pension entitlements.
  • As part of the package of changes, a ‘facilitation payment’ was made to affected employees, calculated as a percentage of salary.
  • Other elements of the package were a:
    • Two-year pay deal with agreed percentage increases.
    • Commitment by E.ON not to make any further pension changes for five years.
    • Set of employer commitments by E.ON, such as an undertaking to employ the majority of the permanent workforce directly.
  • In the case of one employee, Mr Brotherhood, E.ON did not deduct PAYE or NICs from the facilitation payment it made, on the basis that it was not from Mr Brotherhood's employment and was not, therefore, earnings.
    • E.ON’s view was that the payment was to compensate for the adverse changes made to his pension arrangements.
  • HMRC disagreed and raised a Regulation 80 PAYE determination and s.8 NICs decision.
  • E.ON Appealed to the First Tier Tribunal (FTT). The appeal in respect of Mr Brotherhood was treated as a test case in relation to other employees.
  • The FTT found in favour of HMRC, concluding that the facilitation payment was from Mr Brotherhood’s employment as it was an inducement to provide future services on different terms.
    • In the FTT’s view, the payment could not be separated from the integrated package of which it was a part, and which changed the future relationship between E.ON and its employees.
  • E.ON Appealed to the Upper Tribunal (UT).

The UT found that the FTT had erred in law in:

  • Concluding that the decision in Tilley v Wales [1943] AC 386 was restricted to situations where a sum is paid in respect of accrued pension rights rather than future pension rights.
  • Its analysis that the payment was from employment.

The UT set aside the FTT’s decision and remade it, finding in favour of E.ON:

  • There were no findings of fact that supported that the facilitation payment was from employment.
  • While the payment was an integral part of a package which included changes to future employment terms, this did not mean the payment itself was from employment.
    • Instead, as the overall package was dependent on the pension changes, it demonstrated that the payment was made to compensate for those pension changes.
  • The facilitation payment was not paid from Mr Brotherhood’s employment but from something else. Namely, it was compensation for the adverse changes being made to rights and expectations in relation to Mr Brotherhood’s pension arrangements.

Useful guides on this topic

Pensions: Tax rules and planning
What tax rules apply to pensions? What tax relief is available? What tax charges can arise? What planning opportunities are there?

Employer pension contributions
Is there a taxable employment benefit if an employer makes contributions to an employee's pension scheme? What are the rules for employer pension contributions?

Pensions: What happens when you die?
What happens to your pension when you die? What tax is due by your estate? Will your family have to pay Income Tax if they receive your pension going forward? What can you do to mitigate any tax charges? 

Pensions: Tax charge for excess contributions
When does a tax charge arise for excess pension contributions? What are taxpayers' responsibilities under Self Assessment? 

Auto-enrolment: Workplace pensions (subscriber guide)
This guide looks at the key features of auto-enrolment, who is affected, what employers need to do, and the relevant timescales.

External link

E.ON UK Plc v HMRC [2022] UKUT 196

Small acorn
If you like our content come and join us.

Thousands of accountants and advisers and their clients use as their primary TAX resource.

Register with us now to receive our FREE weekly SME Tax News update.