The employee benefit trust definition (EBT) is a trust that has been set up for the benefit of employees. The EBT as it is often known has been used for many years as a form of corporate tax planning. An additional benefit of the employee benefit trust has also been the ability to avoid income tax by the beneficiaries of the trust, who were usually key employees like directors and shareholders. However, the main use of the EBT is a means how to reduce corporation tax. See the table below how the successor to the EBT, the EFRBS (Employer Funded Retirement Benefit Scheme II) is a means of how to reduce corporation tax. Speak to us now about swapping your EBT over to the new scheme.
How do Employee Benefit Trusts work?
Employee Benefit Trusts work because any cash that was moved from the company account into the employee benefit trust was treated as an expense for the company, thus reducing corporation tax liability. The company could even then loan the cash back from the EBT as required in the future and additionally interest was charged on the employee benefit trust loan creating even further expenses for corporate tax planning or simply a means of how to reduce corporation tax. The key employees were then able to also either get an employee benefit trust loan, which was constructed so that it was never paid back, or they could take cash bonuses, which were taxed.
The employee benefit trust HMRC
In December 2010 the employee benefit trust, HMRC legislated against its’ use and it is sadly no longer available in its’ previous form. However there have already been other structures devised to replace employee benefit trusts that can achieve similar results that fall well within the confines of the new laws.
The successor to the employee benefit trust is the Employer Funded Retirement Benefit Scheme II and you can see in the table below how to reduce corporation tax with it. Periodically there are also tax avoidance schemes devised how to avoid corporation tax and income tax like the employee benefit trust did.
If you would like to know more about the employee benefit trust and its successor, the Employer Funded Retirement Benefit Scheme II, corporate tax planning or avoiding income tax, Contact Us here through our request-a-callback form. You can also email our expert employee benefit trust team at info@thetaxexperts.co.uk or call us at 0845 052 3787.
The EFRBS II is one of the replacements of the Employee Benefit Trust and the following is a summary of the tax benefits for the 2011/2012 tax year.
Profit extraction methods costs and benefits compared with EFRBS II
2011/12 Tax Year Comparison
| Method of profit extraction | Bonus | Dividend | HR Co |
|---|---|---|---|
| Available (pre-tax profits) | £ 300,000 | £ 300,000 | £ 300,000 |
| Less employer’s NIC @ 13.8% | 35,062 264,938 |
NIL | NIL |
| Corporation tax (£300k @ 21%) (Note that this will need calculating each time depending on level of profits, associated company numbers, marginal rates of corporation tax, etc). |
NIL | 63,000 | NIL |
| Profits Extracted | 264,938 | 237,000 | 300,000 |
| Income tax and NIC thereon | Bonus | Dividend | HR Co |
|---|---|---|---|
| BonusIncome tax: Profits extracted up to £150,000 top rate @ 40% | 60,000 | NIL | NIL |
| Income tax: Profits extracted in excess of £150,000 top rate @ 50% | 57,469 | NIL | NIL |
| Employee’s NIC: Profits extracted @ 2% | 5,299 | NIL | NIL |
| DividendIncome tax: Profits extracted up to £150,000 top rate @ 25% | NIL | 37,500 | NIL |
| Income tax: Profits extracted up to £150,000 top rate @ 25% | NIL | 37,500 | NIL |
| EFRBS Fees @ amend % here as required 12% |
NIL | NIL | 32,727 |
| Net cash available: | 142,170 | 168,084 | 267,273 |
| Tax suffered or fees charged | Bonus | Dividend | HR Co |
|---|---|---|---|
| NIC – employer’s | £ 35,062 | NIL | NIL |
| Income tax | 117,469 | 68,916 | NIL |
| NIC – employee’s | 5,299 | NIL | NIL |
| Corporation tax | NIL | 63,000 | NIL |
| EFRBS fees charged | NIL | NIL | 32,727 |
| 157,830 | 131,916 | 32,727 | |
| Effective Tax Rate | 52.6% | 44.0% | 10.9% |
Learn How to Reduce Corporation tax and Income Tax
To save time and money when using any consultant it is smart to get a thorough grounding in corporate tax planning and how to reduce income tax beforehand. This is so that your money is not wasted on long-winded explanations and so you know the right questions to ask about the employee benefit trust and other ways of avoiding corporation tax and income tax. To give you a hand with learning about the employee benefit trust, corporate tax avoidance and avoiding income tax we suggest you explore the tax guide that best suits your interests. You can review all our up to date tax guides, including guides about corporate tax planning and about how to reduce income tax, by visiting our Book Shop.
Some guides that apply to the employee benefit trust, avoiding corporation tax, avoiding income tax, or avoiding capital gains tax for British citizens are shown below. For more information on the respective guide, just click on the picture.
