HMRC is bringing in a new tax on pensions (Image: Getty)
A major tax change on pensions being brought in by HMRC risks catching many people off guard. A wealth planner has warned many people could become liable for the levy without knowing it.
Chancellor Rachel Reeves announced in her first Autumn Budget a series of major changes to expand inheritance tax, which is levied at a standard rate of 40 per cent. Some of these changes will come in from April 2026, when the exemptions for paying the tax on agricultural property and business assets will be restricted.
The Government also announced it will expand the remit of the tax to include most unused pension funds and death benefits, which are currently not liable for the levy. This change will come in from April 2027. Chartered financial planner Alex Pugh, from wealth firm Saltus, said this is a huge change and people may not realise it applies to them.
She said: “Inheritance tax planning is already complex, but bringing pensions into the tax calculation from April 2027 really shifts the dial. Many people will drift into the tax net without realising it.
“After property, pensions are often someone’s largest asset, and with tax thresholds frozen since 2009, more estates are being pushed over the line. In truth, any individual or couple could now be affected – even those who never considered themselves ‘wealthy’. It’s a perfect storm created by rising asset values and outdated tax limits.”
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The finance expert went on to explain who in particular may not realise the expanded tax remit will hit them. She said: “Older individuals, particularly those approaching or over 75, are more likely to have built up significant pension and property wealth.
“Homeowners with above‑average property values, especially in areas where prices have soared, may find themselves exposed simply due to house price inflation. Unmarried couples are also vulnerable because they don’t benefit from the same exemptions as spouses or civil partners.”
Under current inheritance tax rules, each individual can pass on up to £325,000 in total assets tax-free. There is also an additional £175,000 allowance that applies to your main residence, if you are passing it on to a direct descendant. There is no tax to pay when inheriting assets from your spouse or civil partner, and you can pass on any unused allowances to them.
This means when the second partner dies and passes on their estate, they can potentially pass on up to £1million in assets tax-free. However, it’s important to note here that the £175,000 property allowance only applies to the property itself.
Martin Lewis recently drew attention to this rule on his BBC podcast. He told listeners: “The property allowance can only be used on the property. It’s not like you get a bigger £175,000 added on top. That can only be used on the property.”
Mr Lewis gave the example of a single person passing on £350,000 in assets along with a £100,000 property. The assets would use up the £325,000 allowance and so would not cover £25,000 worth of the assets.
The property would be covered by the £175,000 allowance, but you cannot use part of the remaining £75,000 from this allowance to cover the other assets. In this case, you would pay the 40 percent tax on the £25,000, with a HMRC bill for £10,000.
Ms Pugh spoke about who else could get a surprise tax bill when pensions become liable for inheritance tax. She said: “People who’ve made large gifts in the last seven years, or those who haven’t reviewed their pension expression of wishes for some time, could face unintended tax consequences.
“And for anyone with an estate tied up in property, the loss of pension liquidity may lead to difficulties; including potential late‑payment penalties if tax can’t be settled quickly enough.”
You can pass on a gift of any amount inheritance tax-free, as long as you give it away more than seven years before you die. You can also give away amounts each tax year, within certain annual allowances. More information on this is available on the Government website.
How big could a surprise tax bill be?
Ms Pugh said it’s hard to know how big an inheritance tax bill could be as it depends on your situation. But she warned that “the numbers can be surprisingly large”.
She gave the example of an unmarried person with no descendants with £20,000 in savings, a property worth £290,000 and a £145,000 pension. They would have nothing to pay under the current rules, but from April 2027, would face a bill for around £52,000 on their estate.
The financial planner said things only get more complex for people over a certain age. She said: “Things get even more complicated if someone is over 75, because pension lump sums also trigger income tax considerations, in addition to inheritance tax.
“And for families lucky enough to have estates above £2million, the gradual tapering of the residence nil‑rate band can significantly increase the final bill. All these factors will have a multiplying effect on what loved ones ultimately receive.”
Saltus recently released its latest Wealth Index Report, where it surveyed the views of high net worth individuals. Many said inheritance tax too high, with 16 percent feeling it is too burdensome.
Pension access rule changes
When looking at your retirement finances, you may also want to factor in your state pension payments. Key changes are just around the corner to the eligibility for the DWP benefit.
From April 2026, the access age will be increasing, rising gradually from the current 66 to reach 67 by April 2028. The full new state pension is currently worth £230.25 a week. Payment rates will rise 4.8 percent in April in line with the triple lock.
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