HR pensions spotlight: what do pensions changes in the UK Budget mean for employers?

The UK chancellor's Autumn Budget last month delivered a range of pensions-related announcements, including plans for a change to the inheritance tax (IHT) treatment of pensions and death benefits and an increase in employer National Insurance contributions (NICs).

Pensions, death benefits and IHT

As part of the Budget, the chancellor announced that the government will remove "the opportunity for individuals to use pensions as a vehicle for inheritance tax planning by bringing unspent pots into the scope of inheritance tax from April 2027".

This seemed to be an announcement that, where someone dies leaving unused defined contribution (DC) pension savings then, from April 2027, those savings will be included in their estate for IHT purposes. The policy aim appears to be to prevent wealthier people from passing all or a significant part of their DC pension savings to others free of IHT.

However, a technical consultation published by HMRC suggests that the changes will have a much wider impact.

DC schemes

As expected, the technical consultation confirms that, under the new rules, DC pension savings which are uncrystallised or in a drawdown fund when a member dies will form part of their estate for IHT purposes.

It looks as though IHT will also be relevant when funds are to pass from a person who received them when the member died and on to another person (known as a "successor").

Lump sum 'death in service' schemes

It is also possible that, from April 2027, any lump sum paid from an HMRC registered lump sum "death in service" scheme (for example, a lump sum of four times salary on death in service) will form part of the deceased employee's estate for IHT purposes.

The technical consultation is not clear on this point. It says that the change will apply to "defined benefits lump sum death benefits" but suggests that there will be a carve out for some life policy products (benefits which are insured) associated with an employer's pension package.

DB schemes

The new rules will also affect defined benefit (DB) schemes. The technical consultation suggests that survivor's pensions – for example, pensions paid to a spouse, civil partner or child – will remain outside of the member's estate for IHT purposes.

Trivial commutation lump-sum death benefits, however – which are paid when a small survivor's pension is exchanged for a one-off lump sum payment – and uninsured lump-sum death benefits (for example, five-year guarantees and uninsured lump sums payable on death in service), will be caught by the change.

It is possible that insured lump-sum death benefits (such as lump sums of four times or some other multiple of salary paid on death in service) and unused additional voluntary contribution funds will also be caught and so form part of the member's estate for IHT purposes.

Not just the wealthy

Under the new rules, it looks as though affected DC pension savings and lump-sum death benefits will only be free of IHT when an exemption applies, such as the estate passes to a spouse, civil partner or a charity. No relief or exemption will apply if an individual's estate passes to a partner, children or other relatives.

It is possible that changes to the IHT nil-rate bands will be made in the future. For the time being, the chancellor announced an extension of the existing freeze on the current nil-rate bands for IHT to 5 April 2030. This means that, until 6 April 2030, a lot of people will have an IHT nil-rate band of £325,000 plus an additional nil-rate band of £175,000 for their main residence if it passes to their children. (Special rules apply where the aggregate estate exceeds £2m.) It is easy to see how quickly the £325,000 nil-rate band could be used up by any unused DC pension savings and lump-sum death benefits alone, without even considering non-pension assets.

As a result, it seems likely that the new rules will bring a lot more estates into charge, and not just the estates of the "wealthy".

Employer pension contributions

The chancellor also announced an increase in employer NICs.

However, she did not announce any change to the NICs treatment of employer pension contributions (employers will still pay no NICs on these) and salary sacrifice (where an employee gives up part of their salary in return for the employer making an increased employer pension contribution) remains possible.

Actions for employers

In view of these changes, employers might consider a number of specific actions.

The IHT change is not due to take effect until April 2027. In view of this, employers might like to wait until more detail is available before taking action. (Draft legislation is expected in 2025.) If it becomes clear that all insured lump sum death in service benefits will be caught, then employers might wish to consider reviewing how they provide these benefits. For example, it might be possible to provide them through an excepted group life policy trust in order to take the benefit outside of the rules for HMRC registered pension schemes.

Scheme administrators will be responsible for reporting and paying any IHT to HMRC. Employers who have in-house pensions administration teams or who run lump-sum death in service schemes might like to consider the suggested process for calculating, reporting and paying IHT that is set out in the Technical Consultation and respond to it before it closes on 22 January 2025.

Employers who run lump-sum death in service schemes should already have checked how the removal of the lifetime allowance and introduction of the lump sum and death benefit allowance affects the administration of, and tax reporting in relation to, that scheme.

If it becomes clear that the April 2027 changes will also apply, then they might wish to consider whether they are comfortable with the additional administration and process changes that will be involved, or whether they would prefer to pass the administration to professional administrators by moving to a group life (or excepted group life) master trust for provision of those benefits.

Turning to the rise in employer NICs, employers who do not currently operate salary sacrifice for pensions contributions may wish to take advice on the option of using it. Employers who already use it may wish to take advice on extending it (for example, to include bonus payments) or on the option of revisiting any arrangement they have for sharing the NICs saving with pension scheme members.