A new 40 percent tax on pensions is soon to come in
Rumours are mounting about potential pension changes in the Autumn Budget. There have been reports that there could be changes to the tax-free lump sum or salary sacrifice regulations. Chancellor Rachel Reeves will present her latest fiscal policies before Parliament on Wednesday, November 26.
Many financial experts are voicing their opinions on what new measures the Government ought to introduce. One such pundit is calling for a substantial overhaul of pension tax relief mechanisms.
Nishi Patel, managing director at accountancy firm N-Accounting, said: “I don’t think the tax benefits on pensions are too generous, however the freedom of investment definitely is. Why should I be getting UK tax relief on my investments when most of them aren’t in the UK?
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“The Government needs to steer the investment into British shares and Government bonds and not allow tax relief for non-domestic products.” Current regulations permit tax relief on pension contributions aligned with your marginal income tax rate.
This means people on the basic 20 percent rate of income tax can claim 20 percent tax relief on contributions, so for every £80 contributed, the Government adds £20, effectively resulting in a £100 payment into your pension pot.
Major 40 percent tax on pensions
One change that is definitely coming up regards inheritance tax on pensions. Chancellor Rachel Reeves announced in the Autumn Budget 2024 that pensions will become subject to inheritance tax from April 2027.
The precise details of how this will work are yet to be confirmed. A previous Government consultation on the proposals outlined these specifics: “Most unused pension funds and death benefits will be included within the value of a person’s estate for inheritance tax purposes and pension scheme administrators will become liable for reporting and paying any inheritance tax due on pensions to HMRC.”
Mark Plewes, head of Pensions Technical at WBR Group, said that the Government needs to provide more details about how the levy will operate. He said: “The timetable is ambitious, and there are still unanswered questions about how the rules will work in practice, particularly around valuations, reporting, and payment deadlines.
“If these complexities aren’t resolved, a delay would be sensible to avoid chaos for personal representatives and pension providers. We’ve urged policymakers to prioritise clarity and practicality over speed, because getting this wrong could create significant administrative burdens and distress for bereaved families.”
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Mr Plewes encouraged those who may face the new levy to start making plans now. He said: “If you have a significant pension pot and other assets, it’s vital to review your estate planning now.
“This might include updating your will, revisiting your expression of wishes forms, and considering strategies such as lifetime gifting or using life assurance to cover potential liabilities. Every individual’s circumstances are different, so professional advice is essential to balance inheritance tax exposure with income needs in retirement. Acting early gives you more options and avoids rushed decisions later.”