{"id":185892,"date":"2025-04-15T10:07:34","date_gmt":"2025-04-15T10:07:34","guid":{"rendered":"https:\/\/peraltafinancing.com\/accounting\/did-you-know-your-pensions-could-be-subject-to-tax-at-67-or-more\/"},"modified":"2025-04-15T10:07:34","modified_gmt":"2025-04-15T10:07:34","slug":"did-you-know-your-pensions-could-be-subject-to-tax-at-67-or-more","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=185892","title":{"rendered":"Did you know your pensions could be subject to tax at 67% or more?"},"content":{"rendered":"


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The autumn budget, delivered on 30 October 2024, proposed a number of significant inheritance tax changes which are set to come into force over the next couple of years.<\/strong><\/p>\n

Amongst the key reforms of abolishing the non-dom regime and changes to Agricultural Property Relief and Business Property Relief, was the significant announcement that from 6 April 2027, undrawn pension funds will now be subject to inheritance tax<\/strong>.<\/p>\n

The Budget changes, coupled with frozen tax-free allowances (unchanged since 2009) and increasing inflation, are accelerating the number of taxable estates.<\/p>\n

The OBR (office for budget responsibility) predicts that the number of estates that will be subject to inheritance tax is set to double from around 1 in 20 estates (2023) to 1 in 10 (2030).<\/p>\n

Inheritance tax is no longer a tax solely for the wealthy, and with a headline rate of 40%, inheritance tax is becoming difficult to ignore.<\/p>\n

This article focuses on the specific changes with regard to pensions.<\/strong><\/p>\n

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The effective tax rate on an individual\u2019s pension is made up by a combination of the funds being subjected to both inheritance tax and income tax.<\/p>\n

From 6 April 2027, the value of the undrawn pension will be inside the individual\u2019s estate for inheritance tax purposes, such that it may be taxable up to a maximum of 40%. If the individual passes away over aged 75, the beneficiaries of the pension scheme will then also be subject to income tax on any further drawdowns.<\/p>\n<\/p><\/div>\n<\/p><\/div>\n<\/p><\/div>\n<\/div>\n

This is best illustrated by way of an example.<\/h3>\n

If we have an individual who has an undrawn pension fund totalling \u00a31 million as at the date of their death, and we assume the estate is left to their children, with all other allowances utilised against the remainder of their estate assets, the pension funds will be taxable at 40%. Leaving \u00a3600,000 net.<\/p>\n

On passing, the pension funds remain within the pension scheme, and the beneficiaries now have the ability to draw down the pension personally.<\/p>\n

If the beneficiaries are additional rate taxpayers, such that their income is subject to tax at 45%, and they choose to encash the pension, a further \u00a3270,000 of tax will be payable. This will leave the beneficiary holding just \u00a3330,000 of the original \u00a31 million pension.<\/p>\n