Clarification of pensions surplus rules could net HMRC extra £10bn

HMRC have today clarified the tax position on refund of pension scheme surplus to employers. The position to date has been unclear, with different interpretations of the tax rules founded on the whether the 25% tax rate is applied to the refund amount received by the sponsor or applied to the surplus in the pension scheme before deduction of tax.

Today’s announcement has confirmed that the 25% tax payable is based on the surplus within the pension scheme. The position based on the alternative interpretation was an equivalent tax rate of 20% of the surplus.

Using data published by the PPF on current buy-out positions, LCP has estimated that this clarification of the rules could bring in an extra £10bn of tax for HMRC over the short to medium term, with more to follow as pension schemes run-on and seek to grow surplus further.

Whilst there may be additional tax to pay, the end of the ambiguity will mean pension scheme sponsors and trustees can now plan pensions endgame strategies with greater clarity on this position and a better understanding of the potential financial upsides for various stakeholders.

LCP partner and Head of Endgame Innovation Jonathan Griffith said: “As more schemes run-on and seek to grow surplus for the benefit of members and other stakeholders, it is helpful that there is now clarity within the tax rules. We eagerly await the government’s response to the consultation on “Options for Defined Benefit schemes” and the Mansion House proposals as these proposals have the potential to make it more efficient for sponsors to run schemes on, share surplus with members, and support the government’s positive investment agenda.”