VAT and employer pension costs: important update
Updated guidance from HMRC affects how employers may recover input VAT on the admin costs for employer-funded pension schemes. This makes it important for employers to review their contractual arrangements and pension scheme structure, and to consider historic VAT recovery claims.
A recap of shifting guidance
HMRC’s past approach considered input VAT on investment to be irrecoverable, and input VAT on administration of the fund to be recoverable. Under this 70/30 approach:
- 70% of the invoice generally related to investment management
- Employers should generally recover only 30% of the input VAT incurred
In 2025, HMRC brought their guidance in line with the EU caselaw.
HMRC’s June 2026 update confirms that full input VAT recovery is generally available subject to normal input VAT conditions, but that:
- The services must properly be supplied to the employer
- The VAT invoice in respect of the pension scheme costs must be addressed to the employer
Since it is common for the pension scheme administrator to contract with and invoice the pension trustees, HMRC have provided guidance for such situations, recommending two ways for an employer to reclaim VAT:
VAT registration by pension scheme trustee
The trustee can register for VAT and invoice its services to the employer. In this case, VAT charged by the trustee becomes the input VAT of the employer. VAT charged by the pension scheme administrator becomes the trustee’s input VAT.
It is possible that some of the trustee’s services may be exempt, in which case the trustee will face an input VAT restriction.
HMRC have made it clear that the employer must actually pay down the trustee’s invoices for this to work. Unpaid invoices and a simple agreement to pay will not, in HMRC’s eyes, work.
As the pension scheme manager will often supply its services to the trustee, the correct approach is not to reissue the invoice to the employer. Rather in that case, HMRC have stated that the trustee may register for VAT and recharge the services to the employer, meaning that the employer will have a VAT invoice from the trustee. The implication is that the trustee will recover as input VAT the VAT charged by the pension scheme manager.
Pension scheme trustee joining employer’s VAT group
If the trustee is a corporate trustee and the VAT grouping eligibility conditions are satisfied, the trustee may join the employer’s VAT group. In this case, any VAT on invoices correctly addressed to the trustee would become the representative member’s input VAT.
- The employer can only recover an appropriate proportion of input VAT in accordance with the usual partial exemption and business/non-business rules
- The employer can only recover the input VAT if it has paid for and received a valid VAT invoice (addressed to the employer) for the services
What employers should do next
It is important to review pension scheme arrangements and ensure any input VAT claim is performed in accordance with the structure in place.
Employers who under-recovered input VAT according to the previous 70/30 split may be able to submit claims for historic input VAT, subject to the normal four-year cap and having sufficient evidence in place to support the claim.
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Frequently asked questions: VAT recovery and employer-funded pension scheme trusts
Can employers now recover 100% of VAT on pension scheme costs?
Yes, full VAT recovery is now generally possible where the usual input VAT rules are met. This reflects HMRC’s updated guidance (VIT44600), aligning with the CJEU PPG case. To qualify, the costs must relate to the employer’s business activities and be incorporated into taxable supplies. Recovery may still be restricted by partial exemption or business/non-business apportionment rules, so a full review of your VAT position is essential.
Why did HMRC move away from the old 70/30 VAT split?
HMRC changed its approach to follow case law established in the PPG decision. Previously, HMRC assumed most pension costs related to investment (and were irrecoverable), limiting recovery to around 30%. The updated guidance recognises that pension scheme administration costs can form part of an employer’s overheads, making the associated VAT recoverable where linked to taxable business activities.
What conditions must be met for VAT recovery on pension costs?
The key requirement is that the supply must be made to the employer and supported by a valid VAT invoice addressed to them. The employer must also pay for the services. If invoices are addressed to trustees instead, input VAT recovery may be denied unless the structure is adjusted (for example, through VAT grouping or recharging arrangements).
What are the main structuring options to maximise VAT recovery?
There are three practical routes:
- Contract directly between the employer and service provider
- Have the trustee register for VAT and recharge costs
- Include the trustee in the employer’s VAT group
Each structure has different compliance and commercial implications, including invoicing, payment flows, and potential VAT leakage. Choosing the right approach depends on how your pension scheme is currently set up.
Do pension scheme trustees need to register for VAT?
Not always, but VAT registration can enable efficient recovery in certain structures. Where trustees register and recharge services to the employer, VAT incurred becomes part of the employer’s input VAT. However, trustees may face restrictions if they supply exempt services, so the overall VAT position should be carefully assessed.
Can businesses reclaim VAT on historic pension scheme costs?
Yes, businesses may be able to reclaim under-recovered VAT from previous periods. Claims are typically limited to the last four years under HMRC’s time limits. You’ll need sufficient documentation, including valid invoices and evidence that the costs relate to your taxable business activities.
What happens if invoices are addressed to the trustees instead of the employer?
VAT recovery could be restricted if the employer is not the recipient of the supply. Simply reissuing invoices is not sufficient in HMRC’s view. Instead, the trustee may need to register for VAT and formally recharge the services to the employer, creating a valid VAT invoice that supports recovery.
How do partial exemption rules affect VAT recovery on pension costs?
Partial exemption may limit how much VAT can be reclaimed if your business makes both taxable and exempt supplies. Even where full recovery is theoretically available under the new rules, businesses must still apply their partial exemption method to determine the recoverable proportion.
Is it enough to agree that the employer will pay pension costs?
No, HMRC requires actual payment to be made. A mere agreement or intention to pay is not sufficient for VAT recovery. The employer must settle the invoice and hold valid VAT documentation to support any claim.
What should employers do now to ensure compliance and maximise recovery?
Employers should review their pension scheme structure, contracts, and invoicing arrangements. This includes checking who receives services, who is invoiced, and whether VAT grouping or trustee registration could improve outcomes. A proactive review can help identify reclaim opportunities and reduce the risk of being challenged by HMRC.
