Inheritance Tax on unused pension funds from 2027:  The UK Government has announced plans to bring most unused pension funds and death benefits into a person’s estate for inheritance tax (IHT) purposes starting from 6 April 2027. This change aims to reduce the potential for using pensions as a tool for IHT planning. Under the new rules, both “discretionary” death benefits (where trustees choose the beneficiaries) and “non-discretionary” death benefits (where members designate beneficiaries) will be taxed equally. The government has opened a consultation on how these changes should be implemented, which can be found here: Technical consultation – Inheritance Tax on pensions: liability, reporting and payment – GOV.UK

Though primarily targeting DC schemes, the changes also extend to DB schemes. Nearly all types of pension death benefits, including lump sum death benefits commonly paid out by DB schemes when a member dies in service, will be affected. This shift will require DB and DC administrators alike to consider IHT implications, which may lead to delayed payment of death benefits as administrators collaborate with the deceased’s estate to determine any necessary tax withholding.

Overseas pension transfers: Transfers from UK registered pension schemes to Qualifying Recognised Overseas Pension Schemes (QROPS) have been subject to a 25% transfer charge since 2017, unless the member lives in that country, with an exemption for transfers to QROPS within the European Economic Area (EEA) or Gibraltar. As of 30 October 2024, this EEA/Gibraltar exemption will no longer apply, meaning all transfers to QROPS will be subject to the 25% charge unless other exemptions apply.  From 6 April 2025, the conditions for being recognised as an “overseas pension scheme” or a “recognised overseas pension scheme” in the EEA will be aligned with those that apply to schemes based in the rest of the world. Additionally, HMRC has confirmed that, from 6 April 2026, “scheme administrators” of UK registered pension schemes must be UK residents.

Employer NICs increase:  In a significant revenue-raising move, the government has announced that the main rate of employer Class 1 National Insurance contributions (NICs) will increase from 13.8% to 15.0%, effective from 6 April 2025. The rate for employee Class 1 NICs will remain at 8.0%.

The Budget also reduces the threshold at which employer Class 1 NICs are payable, decreasing from £9,100 per year to £5,000 per year.

Rumoured measures:  Despite speculation, the Budget contained only minor adjustments to pensions tax policy. Media rumours had hinted at potential reforms, such as a flat income tax relief rate on pension contributions, though this would be complex to implement, especially for valuing Defined Benefit (DB) accrual.

Another anticipated change was a reduction in the tax-free lump sum allowance from £268,275 to around £100,000, though this would require intricate protections for existing rights and yield limited immediate revenue. Similarly, withdrawing the NIC advantages of salary sacrifice for pensions or reducing the £60,000 annual allowance was considered but avoided due to potential complexities and strong opposition from certain groups, notably senior doctors. A proposal to subject employer contributions to National Insurance was also set aside, with the government opting instead for a simpler NIC increase. Finally, Labour’s previous suggestion of reinstating the Lifetime Allowance has not resurfaced under the current administration.

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