UK households taxed on death in service payouts under new inheritance rules

UK households could be taxed on death in service payouts under new inheritance rules. In the Labour Party Budget small print, it shows the payouts – which can be as much as four times the worker’s annual salary – may be caught by a HMRC tax raid.

Some schemes make death in service payments as a pension lump sum payment, which will be in scope of the tax. This includes the police pension scheme, meaning that the families of deceased officers face losing as much as 40 per cent of the money they receive.

The Police Federation of England and Wales spokesman said it was “aware” of the changes and was considering how it will affect their pension schemes. Ros Altmann, a former pensions minister under David Cameron, said: “It will obviously have some knock-on unintended consequences on people who die unexpectedly soon on a company scheme which for many of our public servants of course they should have good pensions.

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“If they are told suddenly their death in service benefit is worth 40pc less then they would have ever dreamed, then those in particularly dangerous public service may think twice about carrying on with their jobs.”

Mike Warburton, The Telegraph’s tax specialist, said that the new rules could become a complete “dog’s dinner”. A Treasury spokesman said in response to the reports in the wake of Chancellor Rachel Reeves' Autumn Statement last week: “We continue to incentivise pensions savings for their intended purpose: funding retirement, and these continue to be supported by tax reliefs."

The spokesperson added: “We expect the impact of this change on serving police officers to be minimal, and there is significant tax relief available so pensioners can have financial security in retirement and pension funds left to a spouse or civil partner will not be subject to inheritance tax.”