In HMRC v E.ON UK Plc [2023] EWCA Civ 1383, the Court of Appeal (CoA) found that a payment made to an employee as part of a package of changes, which included adverse changes to pension rights, was earnings from employment. It was subject to Income Tax and National Insurance.

  • E.ON UK Plc (E.ON) operated different types of Pension schemes for employees, including two categories of defined benefit schemes.
  • 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 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.
    • A commitment by E.ON not to make any further pension changes for five years.
    • A 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 National Insurance Contributions from the facilitation payment it made, on the basis that it was not earnings from Mr Brotherhood's employment.
    • 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 which also concerned the 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) which found in E.ON’s favour.
    • The UT set aside the FTT’s decision and remade it, concluding that the facilitation payment was not paid from Mr Brotherhood’s employment but from something else.
    • The UT found that the payment represented compensation for the adverse changes being made to rights and expectations in relation to Mr Brotherhood’s pension arrangements.
  • HMRC appealed to the Court of Appeal (CoA).

The CoA found that:

  • The package under which the facilitation payment was made related to the rewards and benefits of future employment with E.ON.
    • It was an inducement to work willingly for the future and was therefore earnings from employment.
  • The UT had concluded that the payment represented compensation for changes to future pension rights. This was presented by the UT as an alternative conclusion to the FTT’s view that the payment was made in exchange for changes to future terms of employment, as though it were a question of the payment being one or the other.
    • This was a false logic; the two ‘alternatives’ that the UT compared amounted to saying the same thing but in two different ways. 

The appeal was allowed and the decision of the FTT was reinstated.

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?

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
This guide looks at the key features of auto-enrolment, who is affected, what employers need to do, and the relevant timescales.

External link

HMRC v E.ON UK Plc [2023] EWCA Civ 1383

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