Pensions Bulletin 2024/42 - Budget Special

This Budget Special summarises and comments on announcements made in today’s Speech and accompanying documents published today which are of potential relevance to pension schemes and their members. However, we start with the pensions tax measures that had been widely rumoured but did not transpire.

For our regular weekly update see Pensions Bulletin 2024/41 which was also issued on 30 October 2024.

Pensions tax measures that were not announced 

For a Budget which is raising significant amounts of revenue not signalled during the General Election campaign, what perhaps is surprising is the limited intervention in the recently overhauled pensions tax regime. This is especially so given all the rumours that have been circulating in the media in the last few months.

It had been thought that the Chancellor might introduce a flat rate of income tax relief on member contributions. However, this would have taken many months to implement and be full of complexity, including the need to value defined benefit accrual for those fortunate enough to be accruing such benefits.

Then it was thought that the tax-free lump sum allowance would be substantially cut back, from the current frozen £268,275 (or 25% of fund value if less) to something of the order of £100,000 (or 25% of fund value if less). But this would have needed complex protections for existing rights meaning that little revenue would have been raised in the short term. Almost certainly, fear of this cutback has led to a number of people accessing their pensions earlier than they otherwise would have done.

There was also a suggestion that the NIC advantages associated with salary sacrifice for pension savings would be withdrawn. However, this would have taken many months to implement and required changes to payroll, and as such would be a major exercise for employers to reverse out salary sacrifice structures in place.

There were also suggestions that the £60,000 annual allowance on pension contributions / benefit accrual would be cut back, perhaps alongside a less generous taper. But this would have needed complex anti-forestalling measures to avoid a rush to pay in before the rules changed. It would also most likely have re-ignited the campaign by senior doctors which came to prominence during the last Government.

Finally, it was thought that employer pension contributions would be subject to employer national insurance contributions, but this too has been ruled out, perhaps in favour of a much simpler increase in employer NICs – see article below.

Also, the Labour Party, whilst in opposition, talked about bringing back the Lifetime Allowance. However, that idea does not seem to have been taken forward into Government.

Unused pension funds and death benefits to be brought within the scope of inheritance tax 

The Government is to bring most unused pension funds and death benefits into a person’s estate for inheritance tax purposes from 6 April 2027. This is intended to remove the opportunity for individuals to use pensions as a vehicle for inheritance tax planning. But it also brings “discretionary” (where trustees decide who will receive death benefits) and “non-discretionary” (where members choose who will receive death benefits and which are already chargeable to inheritance tax) onto an equal footing.

A consultation has been launched on the processes required to implement these changes which will apply mainly to UK registered pension schemes. Views are being sought on the means by which pension scheme administrators will report and pay any Inheritance Tax due to HMRC, including any new powers or processes which may be required to ensure that relevant information is exchanged between HMRC, administrators, personal representatives for the deceased’s estate and beneficiaries.

Although the measure has been brought about because of the IHT planning opportunities that DC arrangements provide, it is also to apply to DB schemes. A full list of authorised pension death benefits is set out in Appendix 2 of the consultation paper from which it can be seen that nearly all such benefits across the DB and DC space, including lump sum death benefits typically paid from a DB scheme on death in service will be caught, whether or not the beneficiary is ultimately chosen at the trustees’ discretion.

Consultation closes on 22 January 2025.

QROPS transfers restricted / non-resident scheme administrators

Transfers from UK registered pension schemes to qualifying recognised overseas pension schemes (QROPS) have since 2017 been subject to the overseas transfer charge of 25% of the transfer value, unless specifically excluded and one of these exclusions has been where the transfer is to a QROPS in the European Economic Area (European Union plus Iceland, Lichtenstein and Norway) or Gibraltar. This exclusion will no longer apply to transfers made on or after 30 October 2024.

In addition, from 6 April 2025 the conditions to be an “overseas pension scheme” and a “recognised overseas pension scheme” established in the EEA will be brought in line with those established in the rest of the world.

In the same announcement HMRC states that “scheme administrators” (those responsible for the tax administration) of UK registered pension schemes must be UK resident from 6 April 2026.

State pension 2025 uprating announced

The Chancellor has confirmed that both the Basic State Pension and Single Tier State Pension will increase by 4.1% in April 2025. This is in line with the annual increase in Average Weekly Earnings for May to July 2024, the highest measure this year under the triple lock mechanism (the greater of earnings, September’s CPI which was a 1.7% increase, and 2.5%). This means that the full Basic State Pension is expected to increase from £169.50 per week to £176.45 per week, and the full Single Tier State Pension from £221.20 per week to £230.25 per week. The Pension Credit will also be increased by 4.1%.

The Department for Work and Pensions is expected to publish a policy paper setting out all the benefit and pension rates for 2025 to 2026 in the coming days.

Employer National Insurance contributions to be raised

One of the big revenue raisers in the Budget statement is the increase in the main rate of employer Class 1 National Insurance contribution rates, which will increase from 13.8% to 15.0% from 6 April 2025. Employee Class 1 NICs remain unchanged at 8.0%. In addition, the threshold above which employer Class 1 NICs are paid will decrease from £9,100 pa to £5,000 pa.

Big increase in minimum wage rates

On the eve of the Budget the Government announced that the National Living Wage for those aged 21 and over is to increase from £11.44 per hour to £12.21 an hour from 1 April 2025 – a 6.7% increase. National Minimum Wage rates for younger workers will also increase with, for example, the rate for 18 to 20-year-olds increasing from £8.60 per hour to £10.00 per hour – a 16.3% increase and a first step towards aligning the National Minimum Wage and National Living Wage to create a single adult wage rate, which will take place over time. Further details are set out by the Low Pay Commission.

And in other news…

• Capital gains tax – the 10% and 20% rate of capital gains tax on the sale of shares and similar assets is to increase to 18% and 24% respectively from 30 October 2024. The 24% rate in particular may discourage those close to retirement cashing out retirement savings with the intention of placing such savings into taxed environments, such as General Investment Accounts.
• Inheritance tax – the 40% rate of inheritance tax is to remain unchanged. The £325,000 threshold also remains unchanged as does the £125,000 addition if a home is given to a child or grandchild.
• Income tax and national insurance contribution thresholds – the freeze on income tax thresholds for the 20% and 40% bands (outside Scotland) will not continue beyond 2027/28, nor will the freeze on NIC thresholds.
• Stamp duty – the 3% rate of stamp duty on purchases of second homes, buy-to-let properties and companies buying residential property will increase to 5% from 31 October 2024.
• Corporation tax – remains at 25%, as it has been since the financial year starting on 1 April 2023.  This full rate continues to be applied to businesses with profits over £250,000.  The “small profits rate” of 19% continues to apply to companies with profits of £50,000 or less, with a taper applying for companies with profits between £50,000 and £250,000.