UK households face '91 per cent' tax hike and warned it will be 'painful'

UK households face '91 per cent' tax hike and warned it will be 'painful'

by · Birmingham Live

UK households face a 91 per cent pension tax thanks to an inheritance tax raid from the Labour Party government. Families are urged to carefully review their pension arrangements before the 2027 inheritance tax changes go ahead.

Families could face effective tax rates of up to 91 per cent on inherited pensions under Labour's plans to include retirement savings in inheritance tax calculations from 2027. From April 2027, unused pension funds and death benefits will become part of a person's taxable estate.

A £2million estate left to direct descendants by a couple dying after age 75, including property but no pension, would face £400,000 in inheritance tax, leaving £1.6million for the family, according to new research from groups in the wake of Rachel Reeves' Budget.

READ MORE UK faces -5C snow with 'three regions in England' set to be hammered

Under the new rules, if that same estate included a £700,000 pension, relatives would receive just £60,667 more, facing an effective tax rate of 91 per cent. Chris Etherington, of RSM, said: “The Budget has set an additional bear trap for unwary taxpayers that could prove particularly painful for some.

"The tax system is full of complexities that can result in penal effective tax rates being applied in certain circumstances and this is another one for people to watch out for. There is still the opportunity for the Government to change the rules, but it looks unlikely at this stage. Those potentially impacted by this may therefore want to think about what they can do to lessen the anticipated tax blow to their pension pot."

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: "The dust has started to settle on a truly momentous budget and now it's time to think about what it means for our retirements. The major impact has been the decision to bring pensions into the scope of inheritance tax - a move that is expected to land many more families with a hefty bill and people will need to plan carefully."