Written by Louise Pettit, Professional Support Lawyer, and Richard Knight, partner, in the Pensions team at UK law firm Burges Salmon
One change that could also be under consideration but that has attracted less attention is the taxation of payments made from surplus assets in a DB scheme. This has been a hot topic in recent years as DB schemes increasingly find themselves over-funded and under pressure, from both sponsors and members, to distribute those surplus monies. Of course, we know the Pension Schemes Bill includes provisions designed to mitigate the existing “rules lottery” and make it easier for schemes to make payments from surpluses (please see our Pension Schemes Bill handbook for a summary of the key provisions). And from 6 April 2024 the rate of tax payable on a surplus returned to an employer was reduced from 35% to 25%.
But there have been growing calls for a change to the taxation regime to make it easier to return surpluses to members. Currently, schemes only have a limited number of options to allow members to benefit from surpluses, for example through awarding higher increases or using an augmentation power to uplift underlying pensions. The stumbling block is that these are all ongoing liabilities, the costs of which will fluctuate over time. After decades of under-funded schemes and deficit repair contributions, employers (and to some extent trustees) are wary of adding further ongoing liabilities to the scheme’s balance sheet.
This was raised in the February 2024 “Options for Defined Benefit schemes” consultation (launched under the previous administration). One of the questions asked whether the government should introduce a statutory power for trustees to amend scheme rules to enable one-off payments. As we and a number of other respondents highlighted, the biggest challenge for schemes wishing to make a one-off payment to members is usually the tax position rather than the power to make payments. To address this, a new authorised lump sum payment could be introduced to allow schemes to pay e.g. a one off “surplus bonus” to members.
In its May 2025 response to the consultation, the DWP said that it “believes the pensions tax framework is broadly balanced and fair”, and highlighted the change it had already made to reduce the rate of tax payable on return of DB surpluses to employers. However, it did also say that it is “continuing to consider the tax regime for surplus extraction”.
Recently the Chair of the Work and Pensions Committee wrote to the Pensions Minister on the issue of discretionary payments, particularly for members with non-escalating pre 1997 benefits – another industry hot topic. One of the questions asked there was to please explain “what discussions you have had with HMRC regarding any changes to pension tax legislation needed to enable one-off payments to scheme members?”.
A reply was requested by 19 November but nothing is publicly available as yet – dare we speculate that the need for a response to that particular question might be superseded by Wednesday’s budget? We’ll have to wait and see….
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