Pensions – a new Inheritance tax plan?

Pensions – the new Inheritance tax avoidance plan?

Following the budget, this has been described as a ‘no brainer’ by many and is probably an unforeseen consequence of Jeremy Hunt’s abolition of the pensions lifetime allowance (LTA). In a period of high taxes and the Government needing to pay for the vast borrowings that it has accumulated over the last few years, it did come as somewhat of a surprise. Certainly, he wanted to encourage doctors back to work but such a sweeping change could benefit other high earners as well.

Over the last decade, there has been a creeping increase in Inheritance tax as the £325,000 nil rate band has not increased in line with inflation, let alone house prices. The Office for Budget Responsibility now estimates the freeze on IHT thresholds will bring in £45bn for the Treasury by 2028 – £3bn more than previously expected. However, Jeremy Hunt’s move to lift the pensions LTA means pensions are far more attractive as a means of passing on wealth as money left in pensions can be passed on to your beneficiaries Inheritance tax free, and completely tax free if you die before the age of 75.

The Chancellor also lifted the amount people can save into a pension tax-free each year from £40,000 to £60,000 and any unused allowances from the previous three years can be carried forward. Therefore, with carry forward, you could save £180,000 into your pension and then a maximum of £60,000 for each subsequent year. So technically it’s not unlimited but you could build up a very large pot, Inheritance tax free.

As with everything tax driven in this country, there are other complexities and there are restrictions for the highest earners but there is certainly some tax and pensions planning needed around these changes.

Having said that, one in three high earners unknowingly faces paying the top 45% tax rate next month. As of April, the 45% tax threshold will drop from £150,000 to £125,140. Research from Barclays Wealth shows that one in three of those affected may be unaware of this ‘stealth tax’, so perhaps it is a good time to consider personal pension contributions so as to keep the tax rate under 40%.

How can Haines Watts help?

We advise clients with a broad range of tax and compliance matters throughout the South West region.

If you would like to have a conversation to understand the complexities of the above, please get in touch with your usual Haines Watts contact.