The Government made a number of pension–related announcements in the Budget today. Below we summarise some of the main changes.

Inheritance Tax (IHT) & pensions

The Chancellor Reeves confirmed today that, inherited pensions and death benefits will fall into the scope of inheritance tax (IHT), so that pensions and death benefits passed on will be subject to inheritance tax (IHT) as of 6 April 2027.

Under current rules pensions are not deemed part of a deceased person’s estate and therefore not subject to IHT. As a result of the change the value of pension pots will be included in the total value of other assets, and if valued over £325,000 (the IHT threshold), and subject to other exemptions, it will be taxed. This change will likely result in more estates having to pay IHT. It is not yet clear whether this change is only to lump sums, or if it includes benefits inherited by way of an income and, there is a questions as to how this will apply to defined benefit pension schemes.

Pension scheme administrators should note that as of April 2027 they will become liable for reporting and paying any Inheritance Tax due on pensions to HMRC.

The impact of increasing employers NI on salary sacrifice

The Chancellor also declared that Employer National Insurance contributions will increase from 13.8 percent to 15 percent from April 2025.

The Government will also reduce the secondary threshold, (which is the level at which employers start paying national insurance on each employee’s salary), from £9,100 a year to £5,000. There has been no introduction of National Insurance on employer pensions contributions which was rumoured before the budget was released. Some fear an increase in employer NI could lead to employers seeking to save money elsewhere, for example by reducing pension contributions.

On the other hand, employers may now favour the option to offer a ‘salary sacrifice approach’ to contributions if they don't already, whereby contributions are made before an employee receives their pay/payslip pension contributions and are subject to lower employer national insurance contributions.

Changes for UK pension scheme administrators

With immediate effect, there are changes to the conditions for obtaining relief from Capital Gains Tax on disposal of a controlling shareholding in a company to the trustees of an Employee Ownership Trust. There will also be a small adjustment to the conditions for obtaining Income Tax relief on annual bonuses made to employees of Employee Ownership Trust owned companies, to allow for directors to be excluded from the bonus award. There are also some changes to the conditions that need to be met for a transfer into an Employee Benefit Trust to be exempt from Inheritance Tax.

Pension review

Although mentioned in today's Budget speech, the Government actually introduced its Pension Review in August 2024. The first Phase review focused on developing policy in four areas, including driving scale and consolidation of defined contribution (DC) workplace schemes and tackling fragmentation and inefficiency in the Local Government Pension Scheme (LGPS) through consolidation and improved governance. The review also focuses on encouraging further pension investment into UK assets to boost growth in the economy. The findings will feed into the introduction of a new Pension Schemes Bill. A Second Phase review is due to start later in 2024 and will consider investment and further steps to improve pension outcomes, including assessing retirement adequacy.

How Capsticks can help

Capsticks has significant experience supporting employers on a wide variety of pension issues. We’ll keep you updated on the above developments as they progress, or further information is released. 

If you have any questions around what is discussed in this insight, please contact Neil Bhan, Raj Basi or Rebecca Foster.