Budget changes for pensions

There was much speculation around last year’s budget, and what the Chancellor was going to do to fill the black hole.  For pensions, rumours included:

• Changes to the Annual Allowance (AA)
• Reintroduction of Lifetime Allowance (LTA)
• Changes to tax relief
• Abolishment of Salary Exchange/Sacrifice
• Restrictions on Pension Commencement Lump Sums (PCLS)

So, what did happen and how does it impact my pension scheme? The headliners for pension schemes are the impact of the NI increases on employers and the change in IHT rules.

NI increases

The government is increasing the rate of employer Class 1 National Insurance contribution rates from 13.8% to 15.0%. It is also reducing the per-employee threshold at which employers become liable to pay National Insurance (the Secondary Threshold) from 6 April 2025 from £9,100 to £5,000 a year.

Whilst this does not impact a pension scheme directly, it does add an extra layer of costs for employers – especially service industry-driven sectors where staff costs might be its biggest outlay. Schemes need to consider the impact on the sponsoring employer and whether this impacts the employer covenant. Schemes that pay their own administration costs may also see rising prices as companies look to pass on these costs.

Inheritance Tax

The Chancellor also announced several changes to the Inheritance Tax (IHT) regime. This included plans to bring most unused pension funds and death benefits payable under registered pension schemes and qualifying non-UK pension schemes, within the value of a person’s estate for IHT purposes from 6 April 2027. 

Income tax may also be payable by the recipient of these benefits.

For pension trustees this causes technical challenges to implement. The existing payment deadline for IHT is six months after the end of the month in which the death occurs and late payment accrues interest.

The pension scheme administrators (trustees or pension providers) will be responsible for liaising with the member’s legal personal representative (which could be a grieving family member), before calculating and paying any IHT due to HMRC. Many administrators are concerned that this timeline is unrealistic.

The Government issued a consultation to seek views on the processes required to implement these changes. It ran for 12 weeks between 30 October 2024 and 22 January 2025, with the results expected to be published later this year.