Pension Contributions, Tax-Free Lump Sum, and New Inheritance Tax Rules

The Chancellor’s budget left pension tax rules largely untouched. Individuals can still withdraw 25% of their pension as a tax-free lump sum, up to £268,275 in most cases. Contributions continue to receive tax relief at an individual’s income tax rate, particularly benefiting those with incomes between £100,000 and £125,140 due to the tapering of personal allowances.

Employer contributions remain deductible against profits without any new national insurance charges. The annual combined contribution allowance stays capped at £60,000 for 2025/26.

However, starting 6 April 2027, most undrawn pension funds and death benefits will be included in an individual’s estate for inheritance tax (IHT) purposes. Pension administrators will be responsible for reporting and paying any IHT due to HMRC.

Inheritance Tax (IHT) Rates and Bands

The main rate of IHT remains at 40%, with a reduced 36% rate on estates where 10% or more is left to charity. The nil rate band stays frozen at £325,000, and the additional residence nil rate band for passing on the family home to direct descendants remains at £175,000, both locked until 2030. Together, these allow most married couples and civil partners to pass on estates valued up to £1 million free of inheritance tax. Estates exceeding £2 million, however, will see a tapered reduction in the residence nil rate band.

Gifts made within seven years of death are still classified as “potentially exempt transfers” and may incur IHT, with taper relief applying to gifts made more than three years before death. Despite pre-budget speculation, no changes were made to these rules.

Changes for Farmers and Business Owners

Starting 6 April 2026, agricultural property relief (APR) and business property relief (BPR), which currently offer up to 100% relief on qualifying assets, will be capped at 100% relief on the first £1 million in agricultural and business property, with relief decreasing to 50% on values above that.

These adjustments aim to better focus relief on small family farms and businesses. Additionally, BPR for shares not listed on recognised exchanges, such as AIM shares, will be reduced from 100% to 50%.

As an anti-avoidance measure, these new rules will apply to lifetime transfers made on or after 30 October 2024, if the donor passes away on or after 6 April 2026.Bottom of Form