VIT44600 - Specific issues: funded occupational pension schemes
Employers often provide funded occupational pension schemes which may be a defined contribution scheme (also known as money purchase), a defined benefit scheme, or a hybrid scheme with features of both. A funded occupational pension scheme is one in which the contributions are vested in a trust.
Normal input tax rules apply to costs relating to running pension schemes. Each party (the employer and the trustees) has separate responsibilities, duties and undertakes different activities. Each must consider its own entitlement to treat VAT incurred as its input tax. In running schemes, various professional services are required. These might include the services of solicitors, fund managers, and actuaries. An employer may also provide pensions to his employees by means of personal pension schemes. These may also be established under a trust or may be contract based.
Following the CJEU decision in Fiscale Eenheid PPG Holdings BV cs te Hoogezand (c-26/12) (PPG) HMRC announced changes to the UK rules on input tax deduction in respect of funded, trust based occupational pension schemes. There was a transitional period, running from 3rd February 2014 when HMRC first announced the policy change until 31st December 2017, during which time taxpayers could continue using the old rules whilst a review was carried out. Following the review and in consideration of the difficulties encountered by some taxpayers with implementing options that would allow appropriate deduction of VAT as per PPG, HMRC came to the view that the existing rules for input tax deduction would continue to be available to taxpayers going forward, together with the newer options following PPG.
While these newer options allowed employers to deduct input tax on investment costs, which they could not do previously, HMRC still considered such input tax to have a dual use between the employer and the trustees and required an apportionment of input tax between the two parties.
Following another review, HMRC has implemented a further policy change. From 18 June 2025 employers were able to deduct input tax in full (subject to any partial exemption restrictions in place) on costs that they incur in relation to funded occupational pension schemes. The trustees can also deduct input tax to the extent that they are VAT-registered and make onward supplies to their sponsoring employer.
The following guidance outlines our policy in more detail, and how it should be applied by employers and trustees.