Few of the changes to pensions tax relief some feared and others hoped for were announced in Labour’s first Budget on Wednesday. A move to bring pension pots into scope for inheritance tax was largely welcomed, while some noted the increase to employer national insurance announced today extends tax relief on pensions. Elsewhere, the government is also targeting overseas pension transfers.

Chancellor Rachel Reeves spoke for nearly an hour and a half to deliver her first Budget on Wednesday. It was squarely aimed at marking a change from the previous government and promised to “invest, invest, invest”. Reeves dwelled on the stated failings of the former government, then detailed a huge programme of tax rises and spending – but not before receiving a rap over the knuckles by deputy speaker of the House of Commons Nus Ghani for revealing some contents of the Budget prior to sharing them with MPs.  

The chancellor set out how she would raise and spend no less than £40bn. The bulk of this, £25bn, is set to come from employers via an increase in employer national insurance from 13.8% to 15%, as well as starting employer NICs from £5,000 of an employee’s salary instead of £9,100.  

Reeves refrained from introducing NI on employer pension contributions, which some in the industry had feared would lead companies to reduce how much they pay into pensions, as well as being complex to implement.   

The main tax change in pensions is to bring pensions into scope for inheritance tax, with a consultation on the implementation of this running until 22 January. 

The Treasury said that the inclusion of unspent pensions in IHT “will restore the principle that pensions should not be a vehicle for the accumulation of capital sums for the purposes of inheritance, as was the case prior to the 2015 pensions reforms”, potentially hinting at some further rolling back of pension freedoms yet to come.  

Bringing unspent pensions into scope for inheritance tax from April 2027 will affect around 8% of estates each year, according to the Treasury. It expects to raise £3.44bn between 2027 and 2030 from this measure.  

The taxation of inherited pensions was considered ‘low-hanging fruit’, since these pots were entirely tax relieved on accumulation, investment growth and decumulation if someone died before age 75, and only subject to income tax if the holder died aged over 75. 

Cynics might also say taxing pots on a holder’s death was an easy choice because it does not affect public sector workers. Former pensions minister Steve Webb said earlier this month that the pay deals with unions showed these core Labour voters were the new government’s main priority, and that this would be reflected in their policies. The British Medical Association fired a warning shot on Thursday last week, calling for assurances that Reeves would not reduce tax-free pension lump sum allowances or reintroduce the lifetime allowance – abolished largely in response to lobbying by doctors – nor introduce flat-rate tax relief on pension contributions.
   

While not mentioned in the chancellor’s speech, the government is also planning to reduce tax-free overseas transfers of tax relieved UK pensions. It will remove the exclusion from the Overseas Transfer Charge for transfers to Qualifying Recognised Overseas Pension Schemes in the European Economic Area or Gibraltar with immediate effect, “to address the risk of individuals receiving double tax-free allowances”, looking to raise £5m a year this way.  

In addition, the government said it will bring the conditions for Overseas Pension Schemes and ROPS established in the EEA in line with OPS and ROPS in the rest of the world from 6 April next year.   

It will also require scheme administrators of registered pension schemes to be UK resident from April 2026, in a move likely to be aimed at tackling pension scams, which are often orchestrated from other jurisdictions.  

The Mineworkers’ Pension Scheme, which has no sponsor but enjoys a government guarantee, will see the Investment Reserve Fund – valued at £1.2bn in 2020 – transferred to the trustees. The scheme’s 120,000 members will receive an additional pension, with the Treasury expecting to lose between £60m and £70m a year.   

The trustees told members on Wednesday the new bonus pension is worth 32% of a member’s guaranteed pension.   

“We’re able to do this because the Labour government has made good on its commitment to transfer the Investment Reserve to members," they added.  

The new bonus pension does not increase and is unprotected, so it could be reduced if the scheme has a deficit.   

The government will also review the existing surplus sharing arrangements with the MPS; currently half of any surplus flows into Treasury coffers, a structure the trustees have sought to change for some years. 
  

It is unclear if members of mining pension fund the British Coal Staff Superannuation Scheme will see similar benefits. A spokesperson at the Department for Energy Security and Net Zero recently told mallowstreet that it would consider proposals by the BCSSS trustees if they are “fair to both scheme members and taxpayers”. 
 

 

 

Pension professionals appeared relieved there was none of the chopping and changing in pensions tax that had become a feature under some previous chancellors. 

The chief executive of master trust provider Smart Pension, Jamie Fiveash, felt “reassured that pension changes haven’t been rushed”. 

  

“However, the simple truth remains that people are not saving enough,” he said, calling for an expansion of auto-enrolment. “A timetable of these and similar changes would have been useful, though we are supportive of the government using the pension review to collect industry thoughts and implement considered changes in the upcoming pension [schemes] bill.” 

 

Echoing these views, another master trust CEO, David Lane of TPT Retirement Solutions, said the chancellor has missed an opportunity to increase pension tax relief for lower-rate taxpayers in this Budget, and to cut the age of auto-enrolment into a pension scheme to 18 and remove the lower earnings limit.  

 

“We hope these measures will instead be considered in the second phase of the government’s Pensions Review expected next year,” he said. 

 

The fact there is now one minimum wage for people aged 18 and over means the auto-enrolment age threshold is increasingly “an anomaly”, said Patrick Heath-Lay, CEO of master trust the People’s Pension, who also called for a contributions roadmap in the Pensions Review. 

 

The challenges and complexities for pension tax relief change proved too great for this Budget, suggested Mike Ambery, retirement savings director at provider Standard Life. 

 

“Firstly, they would have been highly complex to implement and secondly, they came with political downsides given their knock-on implications for public sector workers in particular,” he said. 

 

However, he thinks there is a possibility that the government could revisit tax relief alongside pensions issues in the adequacy section of the Pensions Review.  

 

The announcement that pension pots would become part of a deceased’s estate was expected and largely welcomed. The Pensions and Lifetime Savings Association’s chief policy counsel Nigel Peaple was unfazed. 

 

“Plans to make inherited pension pots subject to inheritance tax will impact a small minority of individuals. It is the PLSA’s view that money saved into a pension should be used for paying retirement income for the saver or their spouse or civil partner,” he said. 

 

Including pensions in IHT “makes sense”, said Steve Hitchiner, chair of the Society of Pension Professionals’ tax group, adding: “However, it will be important to see the detail and how this will interact with the practicalities of different pension arrangements.”  

 

Including pensions in IHT could be unexpected for some, suggested Sackers partner Claire Carey.  

 

“The widespread scope of the proposals may take many by surprise. The ‘unspent pensions pots’ being targeted by the inheritance tax proposals currently include both DB lump sum death benefits and DC benefits being paid as income to a dependant through an annuity or a drawdown facility,” she pointed out. 

 

The devil is in the detail, agreed Martin Willis, a partner at consulting firm Barnett Waddingham. 

 

"It's unclear how this will interact with the lump sum and death benefit allowance, and inherited drawdown funds which will be taxable as income when withdrawn,” he said. “And what happens when the pensions funds have to be withdrawn [or] taken as a taxable lump sum in order to fund the IHT bill? Will there be an expectation that pension schemes will pay IHT to HMRC before the distribution of death benefits? We must hope these questions have already been answered, rather than leaving savers in limbo for the weeks ahead."   

 

Hannah English, who heads up DC corporate at Hymans Robertson, said the inclusion of pensions in IHT could lead some DC members to start spending more of their pension pots, and potentially stimulate economic growth by doing so. 

 

She added: “Given this won’t be introduced until April 2027, it suggests that the government needs to put further thought to how this will be introduced in practice and whether any carve-outs may be considered.” 

 

English also highlighted pension implications of the employer NICs hike. She warned that “stacking another cost on the pay and benefits for every UK corporate may drive behaviours that yet again can harm today’s ‘working people’ in their DC pension schemes”, as employers could stop sharing tax relief with staff. 

 

Chair of the Association of Consulting Actuaries, Stewart Hastie, said it was ironic that the hike in employer NICs makes employer pension contributions even more tax efficient elements of reward.  

“We hope government will continue to support and promote initiatives that have employer sponsored occupational pension schemes at the heart of the UK retirement savings landscape.” 

Willis agreed, saying about the NICs increase: “In a complete turn of events, rather than the death of salary sacrifice, we’re now looking at a scenario where it becomes a no-brainer as it offers increased savings to employers. Whilst employees won’t see any additional NI saving - unless their employer shares any of the savings - the potential to move into lower tax and benefit assessment brackets will only become more relevant as people feel the squeeze from suppressed salary increases and increasing costs of goods and services.”

Stewart Grant Hastie

Laurence Edmans

Nigel Peaple

Calum Cooper

Iain McLellan

Martin Willis