Policy paper

Surplus payments to members in a defined benefit pension scheme

Published 13 July 2026

Who is likely to be affected 

Pension scheme administrators and trustees of registered pension schemes who choose to make authorised surplus payments to members of a registered defined benefit occupational pension scheme.  

General description of the measure 

This measure will allow registered defined benefit occupational pension schemes to make discretionary payments of scheme surplus to members as an authorised member payment.

Policy objective 

This measure is part of broader reforms aimed at modernising defined benefit pension scheme management and unlocking economic value. Those reforms are designed to give trustees more statutory powers to modify scheme rules and offer flexible options in the distribution of scheme surpluses to employers and members. These changes aim to make it easier for trustees to safely return surplus funds to employers and members, while maintaining fiduciary safeguards.

Background to the measure 

The government is reforming the framework governing the release of surplus funds from defined benefit occupational pension schemes. The Pension Schemes Act 2026 includes a statutory overriding amendment power, allowing trustees to amend scheme rules to permit payments of surplus to sponsoring employers where such powers do not currently exist or are restricted. The Act also allows for the possibility of sharing surplus with members, subject to scheme rules and trustees’ fiduciary duties. 

The payment of surplus to employers is already permissible under existing pension tax rules where it is treated as an authorised payment and subject to an authorised surplus payment charge of 25%. The person liable for the charge is the scheme administrator making the payment. However, the payment of surplus to members is not currently an authorised payment under the pension tax rules and if paid would be subject to an unauthorised payment tax charge of at least 40%. This measure will make the payment of surplus to a member an authorised member payment and be treated as pension income, which will be subject to the member’s marginal rate of tax.

Detailed proposal 

Operative date 

This measure will have effect on and after the date of Royal Assent to Finance Bill 2026-27.  

Current law  

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).

A surplus may arise when funds held by a registered pension scheme exceed the amount required to meet the scheme’s total liabilities to its members.  

Section 160 of Finance Act 2004 governs the types of payments that a registered pension scheme is authorised to make to or in respect of a member. Payments that do not meet the criteria set out in Section 164 (or associated regulations) are considered unauthorised and may result in a:

• 40% unauthorised payments charge
• 15% surcharge, if the unauthorised payments exceed a certain threshold
• scheme sanction charge of up to 40% on the scheme administrator

Currently, a surplus payment to a member is not an authorised member payment under Section 164 and therefore would be treated as an unauthorised payment.  

Authorised surplus payments to employers is provided for in Section 177 of Finance Act 2004 and defined in prescribed regulations: The Registered Pension Schemes (Authorised Surplus Payments) Regulations 2006 — SI 2006/574,  as amended by The Registered Pension Schemes (Miscellaneous Amendments) Regulations 2011 — SI 2011/1751. The payment is subject to an authorised surplus payment charge of 25%, as set out in Section 207, and amended by The Authorised Surplus Payments Charge (Variation of Rate) Order 2024 — SI 2024/335.

Proposed revisions 

This measure introduces changes to the tax treatment and statutory framework for surplus payments from defined benefit occupational pension schemes. 

The measure amends Part 4 of Finance Act 2004 to introduce a new category of authorised payment: authorised member surplus payments. A new section (section 168A) sets out the conditions that must be met for a payment to qualify, including that the payment is made from surplus assets of a defined benefits arrangement, is calculated by reference to the available surplus, and is paid to a member meeting the relevant age or ill‑health conditions, or to a dependant following the member’s death.  

Authorised member surplus payments are treated as pension income for the purposes of Part 9 of Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). However, they are not treated as pension benefits or lump sums for other purposes within Part 4 of Finance Act 2004. As a result, such payments are excluded from pension input amounts for the purposes of the annual allowance and do not affect an individual’s entitlement to lump sum allowances.  

The measure also makes consequential amendments to existing legislation to rename ‘authorised surplus payments’ as authorised employer surplus payments. These changes are made across Finance Act 2004, the Pensions Acts 1995 and 2004, and supporting regulations to:

• provide consistency of terminology
• distinguish employer payments from the newly introduced member payments 

The changes made by this measure will have effect for payments made on or after 6 April 2027.

Summary of impacts

Exchequer impact (£ million) 

2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030	2030 to 2031
0	+30	+120	+125	+135	+145

These figures are set out in Table 4.1 of Budget 2025 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2025.

Macroeconomic impact 

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families 

This measure is expected to affect:

• members of defined benefit pension schemes meeting the relevant age or ill health conditions
• a dependant following the member’s death, who may receive payments derived from scheme surplus.

This may mean that when such payments are made to members, individuals in receipt may benefit financially. Robust data on how schemes will respond to the measure, including whether and how any surplus is distributed to members, is limited.  

The measure is expected overall to have no impact on individuals’ experience of dealing with HMRC as it doesn’t change any tax administration processes or obligations. It is not expected to impact on family formation, stability or breakdown. 

Equalities impacts 

This measure may apply to individuals regardless of their protected characteristics. HMRC does not hold data that it can use to assess whether there are any disproportionate impacts to protected groups.

Impact on business including civil society organisations 

This measure is expected to have a negligible impact on businesses that sponsor defined benefit pension schemes, as well as pension scheme trustees and associated advisers. Allowing them to make authorised surplus payments to members will make it easier for trustees to return surplus funds to employers and members, while maintaining fiduciary safeguards. 

One-off costs of implementing this change will include familiarisation with the change, updating software, and training or upskilling staff. There are not expected to be any ongoing costs relating to complying with tax obligations.  

Schemes will retain discretion over whether to make surplus payments. Sponsoring employers and trustees may incur one-off administrative and advisory costs in considering whether to make surplus payments and, where relevant, in implementing such payments. This may include engaging actuarial, legal and administrative services. Decisions to distribute surplus and the frequency of any such payments will be determined by scheme-specific circumstances. 

This measure is expected overall to have no impact on businesses’ experience of dealing with HMRC, as it does not change any tax obligations or processes. Civil society organisations are not expected to be directly affected by this measure.

Operational impact (£ million) (HMRC or other) 

HMRC is expected to incur operational costs because of this measure. This change will require changes to IT systems, updates to guidance and comms and staff training to support the implementation and ongoing administration of the measure. It is currently estimated this will cost around £3 million. 

Other impacts 

Other impacts have been considered and none have been identified.

Monitoring and evaluation 

The measure will be kept under review through communication with affected taxpayer groups.

Further advice 

If you have any questions about this change, contact the Pensions Policy team by email: policypensions@hmrc.gov.uk.