VAT Reclaim Opportunity for Defined Benefit Pension Schemes
2nd March, 2026
-
Briefing Note: VAT Reclaim for Defined Benefit (DB) Pension Schemes
Who this briefing note is aimed at
This guidance is primarily for employers sponsoring defined benefit (DB) pension schemes, particularly where investment management costs are material and historic VAT reclaims may therefore be meaningful. While employers with larger or more complex DB schemes, multiple investment managers, fiduciary arrangements, or legacy structures are more likely to see substantial recoveries, the opportunity may also be relevant for smaller schemes depending on the level and nature of investment-related spend. Employers should therefore consider their own circumstances rather than assuming the guidance is only applicable to the largest schemes.
This briefing note is based on HMRC publications and official GOV.UK guidance and is provided for general information purposes only. It does not constitute tax, VAT, legal, or professional advice. Employers should obtain specific advice from appropriately qualified advisers, including VAT or tax specialists, before taking or refraining from any action in reliance on this document. Specialist advice can help employers interpret HMRC’s revised policy correctly, assess eligibility, manage technical risks, and ensure that any reclaim is accurate, complete, and appropriately evidenced.
Background
HMRC has revised its policy on reclaiming VAT on pension fund investment management costs, effective from 18 June 2025.
Under the new policy:
- Employers can reclaim 100% of VAT paid on pension fund investment management costs (subject to certain conditions being met – including that the employer is VAT registered).
- Employers no longer need to split (apportion) these costs between the employer and the pension scheme trustees, as was previously required.
For VAT purposes, pension fund investment management services are services that relate directly to the management and performance of the scheme’s investments.
Typically included:
- Investment manager fees
- Fiduciary management services
- Investment advisory services directly linked to investment strategy, asset allocation, or investment decision-making
Typically excluded:
- Scheme administration and secretarial services
- Actuarial services
- Legal services
- Covenant advice
- General advisory or governance services
A service’s eligibility depends on its nature, how it is contracted, and how it is described and invoiced. In practice, eligibility may vary depending on:
- Whether the service relates directly to investment decision-making or portfolio management
- Whether the employer, rather than the trustees, is the contractual recipient of the service
- How the service is described in engagement letters, contracts, and fee schedules
- How costs are broken down, labelled, and invoiced by providers
This change reflects a policy update, not a change in law. As a result, employers may be able to make retrospective VAT reclaims going back up to four years.
Previously, HMRC restricted VAT recovery using methods such as:
- A 70/30 split between administration and investment costs
- Later, more complex apportionment rules for costs shared between employers and trustees
HMRC has confirmed that these old methods no longer apply to investment management costs incurred by employers.
As of 2026, this generally allows employers to reclaim VAT for periods as far back as January 2022. For example, a business submitting a VAT return covering the quarter ending March 2026 may be able to include eligible VAT incurred from:
- VAT periods ending in 2026
- VAT periods ending in 2025
- VAT periods ending in 2024
- VAT periods ending in 2023
- VAT periods ending in early 2022 (subject to the four-year cap)
The exact periods depend on the company’s VAT return cycle, so employers should verify which periods are eligible.
VAT return cycles
VAT reclaim entitlement is determined by VAT return periods rather than tax or accounting years. VAT return cycles vary between businesses and may be monthly, quarterly, or annual. The four-year time limit is assessed by reference to the end date of each VAT return period, not the employer’s financial year-end or corporation tax accounting period. As a result, two employers submitting claims at the same time may have different earliest reclaimable periods depending on their VAT stagger and filing frequency.
Grey areas to watch
Some services may include both investment management and non-investment elements (e.g., bundled advisory or consultancy services). In these cases, VAT treatment will depend on the dominant nature of the service and how it is structured, contracted, and invoiced. Where services cover multiple activities, it may be necessary to review whether costs can be reasonably separated, or whether only part of the VAT is recoverable.
Employers are expected to evidence the nature of the services for which VAT is reclaimed. This may involve reviewing contracts, service descriptions, and invoices to demonstrate that costs relate to qualifying pension fund investment management services.
Recommended next steps
Maximise time‑limited VAT reclaims
HMRC’s revised policy creates a significant opportunity for employers to reclaim previously irrecoverable VAT on DB pension fund investment management costs. Eligible claims can be made for up to four previous VAT years. However, this opportunity is time-limited, as the earliest eligible VAT periods will continue to fall out of scope as time passes. Employers that delay action may permanently lose the ability to reclaim VAT for older periods, even where entitlement clearly exists.
Align employer and trustee claims
Where trustees have previously made VAT recovery claims for the same periods, careful consideration will be required to ensure that any historic claims remain appropriate in light of HMRC’s revised policy and that VAT is not recovered twice. In circumstances where the employer is now entitled to recover 100% of the VAT on DB pension fund investment management services, there is a risk of overlap or duplication if trustees have already reclaimed VAT on an apportioned basis for those costs. As a result, trustees may need to review historic VAT claims and, where appropriate, revise or adjust them to ensure that VAT is only recovered once and by the correct party. This reinforces the importance of coordination between employers, trustees, and their respective tax advisers when assessing historic positions and progressing any retrospective VAT reclaims.
Balance reclaim value against complexity
Before starting a VAT reclaim exercise, employers should weigh potential recoveries against the internal time, resources, and any external advisory costs involved. While there is no formal minimum scheme size, schemes with higher annual investment management fees, multiple managers, or long-standing historic apportionment are more likely to generate meaningful reclaims. Even for smaller schemes, cumulative VAT over several years may still be material.
In practice, VAT reclaims relating to DB pension fund investment management costs can be technically complex, highly detailed, and time-consuming. This complexity is often driven by historic apportionment methods, multiple schemes, legacy investment arrangements, and the need to ensure that contractual arrangements are appropriately structured. This typically requires contracts to clearly evidence who is the recipient of the supply of services and to be held with the employer or structured on a tripartite basis with trustees and investment managers to support VAT recovery.
Many employers do not have the specialist pensions and VAT expertise internally, nor the capacity within finance and tax teams, to undertake a comprehensive historic review alongside day-to-day business priorities. As a result, there is a risk that entitlement may be understated, delayed, or not pursued at all, despite the potential value of the reclaim.
While employer VAT reclaims ultimately remain the responsibility of the employer and its finance and tax teams, external pensions-focused professionals can also provide targeted, non-tax support to manage complexity, reduce internal resource demands, and help ensure that the opportunity is fully and efficiently realised.
Contact us
We hope you find this information helpful. Should you wish to learn more, we would be happy to arrange a call at your convenience. For further assistance, please contact:
Steven Jones, Senior Pensions Manager
Phone: 07970 307 702
