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Autumn Budget 2024: Pensions subject to Inheritance Tax from April 2027 – but most still won't pay it

Jars with money in saying 'tax' and 'pensions'
Kit Sproson
Kit Sproson
Senior Money Writer – Mortgages Expert
30 October 2024

Pensions will be subject to Inheritance Tax (IHT) from April 2027, the Chancellor has announced, though the vast majority of estates will still not pay IHT despite the changes.

MSE's Autumn Budget 2024 coverage

Check out all of our other MSE News stories following the Chancellor's announcements:

The measures, announced as part of the Budget on Wednesday 30 October, mean that an estimated extra 10,000 estates will be liable for IHT in the 2027-28 tax year, while an estimated 40,000 estates will be liable for more IHT as a result. 

How does inheritance tax currently work? 

As it stands, you're not charged IHT on anything you leave to a spouse or civil partner after you die 

And even if you leave part, or all, of your estate to someone who's not a spouse or civil partner, you're still unlikely to be charged IHT. In fact, IHT is currently only paid by around 4% of estates (that's one in 25). 

That's because IHT is not charged on the first £325,000 of your estate, a threshold that rises by £175,000 to £500,000 if you're leaving your home to a direct descendant, such as a child or grandchild (as long as your estate is worth less than £2 million). And married and civil-partnered couples can also pass on any unused IHT allowance to a surviving spouse or civil partner – potentially increasing their IHT tax-free allowance to £1 million. 

Anything above your IHT tax allowance is charged at 40% (unless you’re leaving anything to charity, which is taxed at 36%). See our Inheritance tax guide for full details.

What currently happens to your pension when you die

Currently, pensions are generally not included when working out the total value of your estate (property, savings, assets, investments, personal items) for IHT purposes. This means pensions aren’t normally subject to IHT. 

Instead, a different type of tax regime applies. How much tax your loved ones will pay on your pension depends on how old you are when you die, though the rules are, as ever with pensions, complicated. Generally:

  • If you die before age 75: your pension can be inherited tax-free.

  • If you die aged 75 or over: your loved ones will pay income tax on what they inherit at their personal tax rate (for example 20%, 40% or 45%).

We've explained how this works in full in our Inheriting a pension guide.

Pensions WILL form part of your estate from 2027 – and be subject to IHT

Today, the Chancellor announced that most unspent pension funds will form part of your estate from April 2027.

This means the value of your pensions when you die will be added up with your other assets to calculate whether your estate will pay IHT. If the value of your estate is above £325,000 (or £500,000 if you’re leaving your home to a direct descendant), any pension funds above that threshold will be liable for IHT at 40%.

Let's look at a simple example. Let's say you die at age 73, and your estate is made up of:

  • Savings worth £50,000

  • A home you're passing onto your child worth £400,000

  • A defined contribution pension pot with £100,000 in it, with your child named as the beneficiary.

This means you have a total estate worth £550,000.

Under the current rules, your estate would have no IHT to pay, as the pension could be inherited tax-free, and the rest of your estate is under your £500,000 IHT allowance (£325,000 plus the extra £175,000 as you're passing on your home to your direct descendants).

Under the new rules, your estate would have a £20,000 IHT bill to pay – as your total estate is £50,000 above your IHT allowance (that £50,000 would be taxed at 40%).

Though if you're passing on your pension to your spouse or civil partner, this can be inherited tax-free, as with any other assets left to a spouse or civil partner.

You could pay both IHT AND income tax on inherited pensions

Under the current rules, the age you die at determines whether your loved ones have to pay income tax on any pensions they inherit from you.

The Government has retained these age rules when it comes to inheriting a pension, which mean that:

  • If you die under age 75: your loved ones will pay no income tax on any inherited pension after IHT has been deducted.

  • If you die aged 75 or over: your loved ones will pay income tax on any inherited pension at their personal tax rate (so 20%, 40% or 45%, for example) after IHT has been deducted.

If you're inheriting a pension that's subject to IHT, it will be taxed at source – meaning any beneficiaries should receive the inherited pension with IHT already taken off. 

Generally, pensions fall into two types: defined contribution pensions (also known as 'money purchase' schemes) and defined benefit pensions (known as 'final salary' pensions). The changes to IHT apply to both types of pension. 

IHT tax-free threshold frozen until 2030 

In addition, the Chancellor has announced that the £325,000 threshold will now be frozen until April 2030. Previously the threshold was frozen until 2028. 

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