Pension tax warning as families told ‘plan well in advance’ of new levy coming in | Personal Finance | Finance

Families have been urged to look over their pensions as they face a new tax bill. Now is the time to start planning as many people will be hit with a 40 percent levy.

From April 2027, the remit of inheritance tax is expanding to include unused pension funds. The hefty 40 percent tax applies to the total value of assets you inherit, above certain allowances.

A Government paper has set out that “personal representatives” will be responsible for paying any tax due on pension funds and pension death benefits, when these assets are passed on. Pensions expert Hannah Martin, founder of www.richretiree.com, has urged people to start planning new as the new tax regime comes in.

She urged: “Whatever you decide to do, it’s important to get good financial advice and get a full picture of your position early, so you can prepare well in advance.”

She said the changes will definitely affect how people arrange their funds: “This will have an impact on how people plan their finances, and how ‘tax efficient’ they view pensions, and the plans they make.” The expert said the new tax may prompt people to draw down from their pensions earlier or to focus more on ISAs as a way to build up their savings, as these accounts are entirely tax-free.

Tax-free allowances

Each person can pass on up to £325,000 in total assets inheritance tax-free, with an additional £175,000 allowance if you are passing on your main home. You can pass on any unused allowances to your spouse or civil partner, meaning they can potentially pass on up to £1million with no tax to pay when they die.

Ms Martin said pensions becoming liable for the tax may also prompt people to make more gifts to their family, to reduce their liability for inheritance tax. You can give away up to £3,000 each tax year tax-free, divided as you choose between any number of people.

You can separately give away any number of gifts up to £250, to different people. You can also give away tax-free amounts out of your regular income.

Other tax changes from next year

However, if you are thinking of increasing your deposits into ISAs, there are some other rule changes to note from April 2027. You can currently deposit up to £20,000 each tax year into these accounts, divided as you choose between cash ISAs and stocks and shares ISAs.

But from next year, you will only be able to use £12,000 of the allowance as you decide, while the remaining £8,000 will only be available to put into investment-based accounts.

Another tax change from April 2027 to bear in mind is that the rate you pay on your taxable interest earnings will go up. Each tax rate for this will increase by two percentage points.

This means the rate for basic rate income taxpayers will go up from 20 percent to 22 percent, for higher rate taxpayers from 40 percent to 42 percent. For those on the additional rate, the rate they pay will go up from 45 percent to 47 percent.