Budget 2024: ‘Devil is in the detail’ of tax change implications

“Unspent pots” will come into scope for inheritance tax, the chancellor confirmed in parliament today, with Reeves saying she was “closing a loophole”.

The government estimates that 8% of estates will be affected by this change, but Claire Trott, divisional director for retirement and holistic planning at St James’s Place, warned that “the devil will be in the detail”.

She said it was currently unclear whether the tax would apply to lump sums or income.

“In addition, we need to know how this will work for defined benefit pension schemes, if included, where individuals have no access to increased income to pay a charge,” Trott added.

“The delay in implementation of this change is welcome, allowing these questions to be resolved and giving individuals some time to plan."

Steve Hitchiner, chair of the Society of Pension Professionals’ tax group, agreed with Trott, saying: “This [change] makes sense, and is a more attractive solution for raising revenue than many of the speculated alternatives such as reforming pensions tax relief or imposing national insurance contributions on employer pension contributions.

“However, it will be important to see the detail and how this will interact with the practicalities of different pension arrangements.”

Martin Willis, partner at Barnett Waddingham, said the change showed that the chancellor “isn’t pulling any punches” in her aim to raise £40bn through taxation.

However, there were a number of technical questions to be addressed, he added, including how the tax will interact with the lump sum and death benefit allowance, and whether schemes will become liable to pay inheritance tax to HM Revenue & Customs before paying any death benefits.

“We must hope these questions have already been answered, rather than leaving savers in limbo for the weeks ahead,” Willis said.

Malcolm Reynolds, Aptia’s UK president, said the move was “ultimately a public acknowledgement that pensions are exactly what they are – a wage in retirement and not a tool for estate planning”.

Frozen tax thresholds

Reeves confirmed that the government would retain the income tax thresholds as they are until the end of the 2027-28 tax year. Her predecessor, Jeremy Hunt, froze the thresholds at 2021-22 levels until 2027-28, bringing in billions of pounds in income tax as personal incomes rose.

Reeves said the thresholds would be linked to the retail prices index from 2028-29.

Mike Ambery, retirement savings director at Standard Life, pointed out that the decision to freeze income tax thresholds was “one of the biggest tax raising measures of recent years”.

“As the personal allowance will now rise beyond £12,570, many lower income pensioners will be relieved to see their state pension income less likely to fall into scope,” Ambery said.

“From next April, the state pension alone will be 95% of the personal allowance, leaving pensioners with only £594.40 of headroom before they begin paying income tax.”

The lump sum conundrum

Separately, Shayala McRae, principal at LCP, highlighted that while the income tax thresholds would be unfrozen from 2028, the current tax-free lump sum allowance remains frozen at £268,275 – the same level it has been since April 2020.

Adjusting for inflation, McRae said this had fallen in value by around 23% since then.

She explained: “Other pension allowances have also been similarly impacted by limits being frozen over time, with the real value of trivial commutation lump sum and small lump sum limits being reduced by 33% since they were last uprated in 2014, and winding up lump sums by 39% since 2012.

“This silent and steady erosion of pensions allowances should not be ignored. At this rate, by the next general election the tax-free allowance will have reduced a third in real terms since 2020 and the allowance on wind up will have halved since 2012.”