As part of the government's plans to free up defined benefit scheme assets for investment in 'growth areas', the authorised surplus payment charge (the "ASPC") will be reduced from 35% to 25% from 6 April 2024.
The ASPC is a freestanding income tax charge on payments returned by registered occupational pension schemes to sponsoring employers. The reduction is good news for employers, who will suffer lower deductions on surplus payments.
Very crudely, the ASPC exists to reverse-out the tax relief arising to employers (as a deductible expense) when pension contributions were originally made. That rationale explains why the ASPC doesn't fall on payments made to tax exempt entities or charities: those employers wouldn't have received tax relief on amounts contributed, and so no tax is charged on the surplus funds' return leg.
The historic wrinkle was that the ASPC didn't necessarily mirror the tax relief on the contribution paid. Relevant firms may not have paid corporation tax at the headline main profits rate, or, even if they did, that rate may have been lower than the ASPC. The increase in the UK corporation tax from 1 April 2023, and the new reduction of the ASPC (both are now set at 25%) goes some of the way to rectifying the mismatch – it's perhaps too strong to call it an injustice.
It remains the case that employers who previously received relief in periods when corporation tax was set at a lower level will suffer the surplus charge rate. Though given relevant schemes may have been (part) funded way back when corporation tax was even higher than the surplus charge now is, the converse position is possible. In either case, employers won't necessarily come out flat in relation to the payments, but the new convergence between CT rates and the surplus charge means those issues should diminish with time.
The change also, of course, supports the government's liberation of assets held in defined benefit schemes. Exactly how and to what degree remains unclear. To the extent the 35% charge stood in the way of schemes extracting capital, the reduced rate makes transfers more appetising. But our experience is stringent rules on repayment of surpluses and limited capacity in the insurance market are the real factors trapping assets. Not the tax charge.
The Autumn Statement stressed the government is consulting on changing those rules in the winter, so it will be interesting to see how they propose to free up surpluses whilst protecting member benefits. Watch this space.
If you would like to discuss the implications of this development, please speak to one of our Tax or Pensions experts.