Thousands of people could be affected by a major change to pension taxation, with action needed in the coming weeks. The Government is introducing a new tax on retirement pots, following plans announced by Labour at its first Budget in 2024 to expand the remit of inheritance tax.
Under the measures, pensions will become liable for the 40 per cent tax from April 2027. Previously, pensions were considered outside of an estate for inheritance tax purposes, meaning they were one way to pass on wealth without attracting a bill from HMRC.
Petition urges reversal
Campaigners are seeking to halt the plans. A petition to Parliament has been running for several months, calling for the proposal to be shelved. The petition urges the Government to reverse the planned change in April 2027 to include private pensions in estate estimates for inheritance tax.
The petition argues that the change "disproportionately penalises single or unmarried couples due to £325,000 individual tax allowance (plus £175,000 if house goes to children)". These figures refer to the allowances applied to an estate when passing it on. There is an individual nil rate allowance, allowing up to £325,000 in total assets to be passed on tax-free, plus another £175,000 when passing a main residence to a direct descendant.
Unused allowances can be passed on to a spouse or civil partner. If all allowances are unused, they could be effectively doubled on death, allowing up to £1 million to be passed on tax-free. Single people only get half the allowances applied to their worldly goods, meaning they could potentially pay up to £200,000 more.
Impact on estates
The petition also argues that more people are being dragged into paying inheritance tax, beyond those the tax was originally meant to target. Campaigners say inheritance tax was originally intended for the rich, those with mansions, estates and land, but due to frozen limits and fiscal drag, it now brings even low and middle earners into paying the tax, especially if private pensions are included in estates as planned.
The petition states: "A person with just an average house, who saved for retirement could end up with a huge tax bill." It also notes the change disproportionately affects single parents or unmarried couples due to the limit for tax-free allowances.
Closing soon
The petition is closing in less than a month's time, leaving only a few weeks to sign support on the petition website.
Policy documents state that the new tax will apply to "most unused pension funds". Most estates will not have to pay inheritance tax even after the changes. Government estimates from 2025 suggest that of around 213,000 estates with inheritable pension wealth in 2027 to 2027, some 10,500 will now have an inheritance tax liability where previously they didn't. The average bill is expected to increase by £34,000 with pension assets being factored in.
