Disguised remuneration: tax avoidance using unfunded pension arrangements (Spotlight 58)
Source: gov.uk (2025-11-18)

Find information on 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.

How the arrangements claim to work

The company enters into an agreement with its director to give that director the right to receive a pension from the company in the future. While receipt of the pension is not relevant to the effectiveness of the scheme, HMRC believes that for some of the arrangements, the director will never receive a pension payment. The company then claims a Corporation Tax deduction equal to the current value of the total future pension to be paid to the director.

Many arrangements may involve further steps, involving the company transferring its obligation, to pay the director a pension in the future, to a third party. The third party is often a relative of the director or another director of the same company.

The company agrees to make a payment to that third party, in return for the third party assuming the company’s obligation to pay the director the pension. This payment may be made to the third party, or the third party can ask for a payment to be made to the director instead.

These arrangements claim to result in the director, or a third party linked to the director, receiving funds from the company. The funds are claimed to carry no immediate liability to Income Tax and National Insurance contributions.

Regardless of the tax effect, these arrangements often result in unusual outcomes. For example, a spouse agreeing to pay their partner a pension without receiving anything in return or directors agreeing to mutually assume pension obligations to each other, with the apparent effect that each will end up paying a pension to the other.

The GAAR Advisory Panel (https://www.gov.uk/government/groups/general-anti-abuse-rule-advisory-panel) has given three separate opinions on sets of arrangements. The relevant opinions are the opinions of:
- the GAAR Advisory Panel opinion of 11 February 2022 (https://www.gov.uk/government/publications/gaar-advisory-panel-opinion-of-11-february-2022-rewards-via-creation-and-sale-of-pension-obligation)
- the GAAR Advisory Panel opinion of 7 August 2024 (https://www.gov.uk/government/publications/gaar-advisory-panel-opinion-of-7-august-2024-reward-through-creation-and-sale-of-a-pension-obligation-with-consideration-paid-to-the-owner-of-the-pen)
- the GAAR Advisory Panel opinion of 29 October 2024 (https://www.gov.uk/government/publications/gaar-advisory-panel-opinion-of-29-october-2024-reward-through-creation-of-an-obligation-to-make-pension-payments-to-employees-and-the-transfer-of-tha)
In all instances the panel considered that it is not a reasonable course of action either to enter into, or carry out, these tax arrangements.

What will happen to those who use these arrangements

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
Users of these arrangements may be charged a penalty for submitting an inaccurate tax to return to HMRC. There are different rules for penalties when the inaccuracy relates to tax avoidance arrangements. Read about penalties for careless inaccuracies relating to tax avoidance (https://www.gov.uk/government/publications/compliance-checks-penalties-for-careless-inaccuracies-relating-to-tax-avoidance-ccfs7c).

In deciding whether to counteract your arrangements, HMRC may consider the opinions already given by the GAAR Advisory Panel. For HMRC to do so, both of the following needs to be true:

you have used arrangements that in substance operate in the same way as those already considered by the GAAR Advisory Panel

the arrangements were entered into on or after 17 July 2013

You may also receive an accelerated payment notice if you receive a GAAR counteraction notice. This means you will have to pay the disputed tax upfront while HMRC continues its investigations. There is no right of appeal against an accelerated payment notice, but taxpayers can make representations.

Where the GAAR applies and the arrangements were entered into after 14 September 2016, users may be subject to a 60% GAAR penalty.

This Spotlight 58 covers arrangements that operate in substantially the same way as those considered by the GAAR Advisory Panel, as well as similar arrangements.

Where you have used arrangements that are not equivalent to those already considered by the GAAR Advisory Panel, HMRC will consider whether the GAAR might apply to those arrangements. A new opinion would need to be obtained from the GAAR Advisory Panel before HMRC could counteract the arrangements under the GAAR.

What this means for promoters

We will pursue anyone who designs, promotes, sells or otherwise enables others to use these arrangements.

This includes charging an enabler’s penalty (https://www.gov.uk/government/publications/compliance-checks-penalties-for-enablers-of-defeated-tax-avoidance-ccfs43) 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.

This penalty applies where any of these arrangements have been enabled and entered into on or after 16 November 2017.

HMRC will also use its powers under the promoters of tax avoidance schemes (https://www.gov.uk/government/publications/promoters-of-tax-avoidance-schemes-guidance) regime against those who promote tax avoidance schemes.

Scheme promoters should carefully consider the disclosure of tax avoidance schemes (DOTAS) legislation (https://www.gov.uk/guidance/disclosure-of-tax-avoidance-schemes-overview) to decide if the arrangements they are marketing should be declared to HMRC (https://www.gov.uk/guidance/forms-to-disclose-tax-avoidance-schemes).

What to do if you’re using these or similar arrangements

If you think you’re already involved in these or similar arrangements, talk to HMRC about getting out of an avoidance scheme.

If you’re using this or similar schemes or arrangements, HMRC strongly advises you to withdraw from it and settle your tax affairs.

You should take appropriate steps to contact HMRC before you take action to withdraw from the specific scheme arrangements contained in this Spotlight.

If you’re already speaking to someone in HMRC about your use of an avoidance scheme, you should contact them to discuss this further.

If you do not have an HMRC contact and you want to get out of this, or similar arrangements, you can contact HMRC to talk about getting out of an avoidance scheme (https://www.gov.uk/government/organisations/hm-revenue-customs/contact/tax-avoidance-getting-out-of-an-avoidance-scheme).

Anyone concerned about the schemes they are currently using should also consider:
- getting independent professional tax advice (https://www.gov.uk/tax-help)
- speaking to one of the tax charities such as TaxAid — find out more about the TaxAid helpline on the TaxAid website (https://taxaid.org.uk/i-need-help-with-tax)
Get more information or report a scheme

You can contact HMRC to report tax avoidance arrangements (https://www.gov.uk/report-tax-fraud), schemes and the person offering you the scheme. You can do this anonymously and do not have to give your name, address or your email.