HMRC has published a policy paper confirming that the authorised surplus payment charge will be reduced from 35 per cent to 25 per cent from 6 April 2024.

The measure, which was first announced in the Autumn Statement in November, will reduce the amount of tax due on the amount of the pension scheme surplus being returned to an employer in relation to the scheme.

The government previously announced plans to relax defined benefit (DB) scheme surplus rules, with the aim of incentivising investment in UK growth, driving consolidation, enabling schemes to invest in a more diverse portfolio, and providing better outcomes for savers.

Currently, a tax charge of 35 per cent is due on pension surpluses being returned to the scheme sponsor, but this is to be reduced to 25 per cent from 6 April.

The authorised surplus payments charge is a free-standing tax on the scheme administrator and the payment is not treated as income under any other tax provision, therefore the tax is due even if the employer receiving the payment is making a loss.

The current pensions tax rules for registered pension schemes came into force on 6 April 2006 and are set out in part 4 of the Finance Act 2004 (FA04).

HMRC’s updated legislation will amend section 207(4) of FA04 by replacing 35 per cent with 25 per cent.

It forecast that the impact on the Exchequer would be -£5m in 2023/24, negligible in 2024/25 and 2025/26, and -£5m in each of the following years up to 2028/29.

“The nature of the change means this could benefit shareholders of sponsoring employers and, depending on scheme rules on how the surplus can be shared, this could also benefit scheme members,” HMRC stated.

“Traditionally, men tended to accrue more pension rights than women and so might benefit more from this measure, although auto-enrolment will modify that over time.

“This measure is expected to have a negligible impact on businesses who administer occupational pension schemes. One-off costs will include familiarisation with the change. There are not expected to be continuing costs.”

The amendment will be kept under review through communication with pension scheme administrators who operate occupational pension schemes.

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