Employee Benefit Trusts and Disguised Remuneration: HMRC's Crackdown 2026

What is an Employee Benefit Trust?

An Employee Benefit Trust (EBT) is a discretionary trust created by an employer. The employer contributes funds or assets to the trust; the trustees hold those assets for the benefit of employees (and sometimes their families). Trustees have discretion over when and how to distribute benefits.

EBTs have a long and legitimate history in UK employment law:

• Share Incentive Plans (SIPs) require a trust to hold shares on employees' behalf.
• Employee Share Ownership Trusts (ESOTs) fund management buyouts or broad-based share ownership.
• Deferred bonus plans can use EBTs to defer payment of bonuses, aligning with long-term performance conditions.

However, from the 1990s through the 2010s, EBTs were widely promoted as tax avoidance schemes — particularly "disguised remuneration" arrangements where employers paid into EBTs that then made interest-free "loans" to employees. The loans were never repaid (never intended to be), effectively delivering tax-free salary.

Disguised remuneration: Part 7A ITEPA 2003

The disguised remuneration rules in Part 7A of the Income Tax (Earnings and Pensions) Act 2003 were introduced in 2011 to shut down these arrangements. They work by charging income tax (and NI) when a "relevant step" occurs.

What is a relevant step?

A relevant step includes:

• A loan or advance made to an employee or their associate by a third party (including an EBT trustee).
• A transfer of assets from a third party to an employee.
• A crediting of an amount to an employee by a third party.
• Certain earmarking of assets for an employee's benefit.

When a relevant step occurs, the amount is treated as employment income and subject to income tax and Class 1 NI at the time the step occurs.

Avoidance of double taxation

If an amount was already subject to Part 7A when a loan was made, and the loan is later repaid, a deduction may be available to avoid double taxation. However, in practice most EBT loan schemes involved loans that were never repaid — making double tax adjustments theoretical.

The loan charge: 2019 onwards

The loan charge (Finance (No.2) Act 2017) was introduced to address EBT loans made before the 2011 Part 7A rules, or structured to avoid Part 7A, that remained outstanding as at 5 April 2019.

How the loan charge worked

All outstanding loan balances from disguised remuneration schemes as at 5 April 2019 were treated as a single employment income payment received on 5 April 2019. This meant:

• Income tax was due for 2018/19 at the individual's marginal rate on the full outstanding balance.
• NI contributions were due.
• The entire historical amount was taxed in one year — potentially at 45% additional rate.

This created very large, concentrated tax bills for many contractors and employees who had used these schemes — often on the advice of their employers or promoters, and sometimes without understanding the tax risk.

The Morse Review and reforms

An independent review (the Morse Review, 2019) led to some modifications:

• Loans made before 9 December 2010 are excluded from the loan charge.
• Individuals can elect to spread the loan charge income over three tax years (2017/18, 2018/19, 2019/20) to reduce bunching.

These modifications reduced but did not eliminate the impact for many affected individuals.

HMRC settlements in 2026

HMRC's Disguised Remuneration Settlement Service remains open. Settling an outstanding disguised remuneration position involves:

• Agreeing the taxable amount of historical arrangements.
• Calculating income tax and NI due.
• Paying arrears plus interest (which continues to accrue).

HMRC has stated that settling before a formal investigation is opened typically results in lower interest and no penalties (penalties apply where there was deliberate non-disclosure).

If you or your employer used an EBT loan scheme and have not yet settled: Take specialist advice immediately. The longer the position remains open, the greater the interest charges.

Employer NI on EBT contributions

Where an employer makes a contribution to an EBT and a relevant step then occurs for an employee:

• Employer Class 1 NI (15% from April 2025) is due on the amount of the relevant step.
• This applies in addition to the employee's income tax.
• The employer's NI cannot be transferred to the employee without a specific settlement agreement.

For many employers who used EBT schemes, the employer NI exposure on historical contributions is a significant additional liability — separate from the employees' personal income tax bills.

Legitimate EBT uses in 2026

Despite the crackdown on avoidance, EBTs remain useful when structured correctly:

Employee Share Incentive Plans (SIPs)

A SIP must be set up with an approved trust. Employers contribute cash or shares to the trust, which then allocates shares to employees. Employees receive shares tax-free within the SIP if held for five years. The trust structure is not avoidance — it is HMRC-approved.

Enterprise Management Incentive (EMI) options

EMI options are HMRC-approved share options for smaller trading companies. While not technically requiring an EBT, many companies use a trustee structure to hold unissued shares. EMI options carry significant tax advantages — gains are taxed at CGT rates (10% under Business Asset Disposal Relief) rather than income tax rates.

Deferred remuneration plans

Some employers use EBTs to hold deferred bonuses — bonuses earned but not paid immediately, subject to future performance conditions. If structured so that tax arises when benefits vest (rather than when contributions are made), this is legitimate. HMRC scrutinises these structures closely — they must genuinely defer income, not eliminate it.

HMRC's task force in 2026

HMRC maintains an active Disguised Remuneration Task Force pursuing:

• Individuals who received EBT loans but have not settled.
• Promoters who marketed avoidance schemes.
• Employers who facilitated arrangements without proper disclosure.

If you receive a nudge letter or enquiry from HMRC's Disguised Remuneration team, seek specialist tax advice before responding. Early engagement with HMRC generally produces better outcomes than ignoring correspondence.