How did the UK Budget affect pensions?

The chancellor of the exchequer delivered the first Budget of the new government yesterday. What were the key announcements affecting UK pensions?

Pensions, death benefits and inheritance tax

The government announced that it will bring unused money purchase pension funds and death benefits payable from a pension into a person’s estate for inheritance tax (IHT) purposes from 6 April 2027.

The scope of this change is not entirely clear. A technical consultation paper released alongside the Budget suggests that dependant's pensions to be paid from final salary schemes will not be included in a member's estate for IHT purposes, but that trivial commutation lump sum death benefits and some, if not all, other lump sum death benefits will be.  

For money purchase (or defined contribution) pension savings, it looks as though any funds remaining at death will be included in a member's estate for IHT purposes. 

At the end of the consultation paper there is a statement that "[a]ll life policy products purchased with pension funds or alongside them as part of a pension package offered by an employer are not in scope of the changes", but it is not clear what this will cover.

The Budget document says that the intention of this change is to " 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" and projects that it will only affect around 8% of estates each year. However, the lump sum death benefit changes look to have a much wider reach than this.

The consultation on this change will run until 22 January 2025, but relates purely to implementation. Trustees and employers should look out for more detail. At this stage, it looks as though the change will have a limited impact where benefits are paid to a surviving spouse or civil partner, but could have significant implications, for example, for couples who live together but are not married or in a civil partnership, for any situation in which benefits would be paid to a child, grandchild or other relative, or where someone dies after the age of 75.     

Also relevant in this context is the chancellor's announcement of an extension of the existing freeze on the IHT nil-rate bands from April 2028 to 5 April 2030.

National insurance contributions

In line with the Labour Party manifesto commitment, there is to be no increase in the basic, higher or additional rates of income tax, employee national insurance contributions (NICs) or VAT.  The current freeze on the thresholds for income tax and employee NICs will remain in place until April 2028. From April 2028, they will increase in line with inflation.

For employers though, there is significant change. From 6 April 2025 the rate of employer NICs will increase by 1.2% to 15%. The per‑employee threshold at which employers start to pay national insurance will be reduced from £9,100 a year to £5,000 a year from 6 April 2025 until 6 April 2028, and then increased by the consumer price index thereafter.

To support businesses with these changes, the government is making changes to the Employment Allowance (which currently allows some businesses to make deductions from their employer NICs bill).

The good news for employers is that no change has been made to the NIC treatment of employer pension contributions and that salary sacrifice (where an employee gives up part of their salary in return for the employer making an increased pension contribution) is still possible.

Minimum wage

The government has accepted the recommendations of the Low Pay Commission in full and the National Living Wage (NLW) will increase by 6.7% to £12.21 per hour from April 2025.

Over time, the government intends to create a single adult wage rate. To begin to close the gap with the main NLW rate, from April 2025 the National Minimum Wage for 18-20 year olds will be £10.00 per hour, an increase of 16.3%.

These increases will benefit staff, but could increase both wage and pension contribution costs for employers.

Investment in the UK economy and infrastructure

This remains a key theme and the chancellor referred to using the current pensions investment review (stage one of its wider pensions review), along with the recently announced British Growth Partnership, to unlock more UK pension fund investment into UK growth assets.

Scheme administrators and overseas transfers

The government will require scheme administrators of registered pension schemes to be UK resident from 6 April 2026.

To address the risk of individuals receiving double tax-free allowances it will also change the law so that the exclusion from the 25% overseas transfer charge will not apply to transfers to qualifying recognised overseas pension schemes established in the European Economic Area (EEA) or Gibraltar made on or after 30 October 2024.   

From 6 April 2025, the government will bring in line the conditions of Overseas Pension Schemes and Recognised Overseas Pension Schemes established in the EEA with those established in the rest of the world.

The full detail of these changes is set out in a policy paper.

State pension

The government will maintain the state pension triple lock for the duration of this parliament. The basic and new state pension will increase by 4.1% from April 2025, in line with earnings growth.

Mineworkers pensions

The government will deliver on its manifesto commitment to transfer the Mineworkers Pension Scheme Investment Reserve to the scheme trustees. This will be paid out as an additional pension to members of the scheme and the government will review existing surplus sharing arrangements.

Osborne Clarke comment

We welcome the fact that the government has not made wider changes to pension tax. Any attempt to re-introduce the lifetime allowance, reduce the annual allowance or make other changes to tax relief on pensions contributions, to the new tax-free lump sum allowance or to the NIC rules for employer pension contributions could have had significant repercussions.

However, it is vital that the detail of the new inheritance tax measure is clarified quickly in order to allow pension schemes and their members to understand and prepare for it. It is also worth noting that the annual allowance and new lump sum allowance and lump sum and death benefit allowances will all remain at their existing levels, and that, in real terms, this represents a reduction of the benefit they offer to pension scheme members. 

For further analysis of the Budget's implications for business tax, please see our Insight.