The arrangements are used to reward a director for the services they provide to a company. This is done in a way that seeks to avoid paying income tax and National Insurance contributions, while obtaining corporation tax relief at the same time.

HMRC strongly believes these arrangements do not work and said that it would ‘seek to challenge anyone promoting or using these arrangements and we’ll make sure the correct tax is paid’.

The company enters into an agreement with its director to give that director the rights to receive a pension from the company in the future. However, due to the structure of the arrangements, HMRC believes that the pension is never likely to be paid to the director. The company then claims a Corporation Tax deduction. This deduction is equal to, what is claimed to be, the current value of the total future pension to be paid to the director.