HMRC to tax pensions of workers who die before pension age
HMRC has now confirmed that death duties will still be charged even if the worker died before they could spend any of their retirement savings. Under current rules that would mean pensions would be taxed at up to 40% if they are part of an estate that exceeds the inheritance tax threshold - currently £325,000.
But, as Martin Lewis explained in a video, posted on his Twitter feed, Inheritance Tax is paid by relatively few people: "This is a tax there are so many misunderstandings about. Most people, when they die, their estates will not pay inheritance tax. This is primarily a tax that only affects the most affluent households."
Near retirement? There's a huge tax trap to avoid when withdrawing from a pension. This is my simple video analogy but always get 1-on-1 free guidance from PensionWise first.
This is just a titbit, watch my full Pension special on: https://t.co/lVn7Zofcag pic.twitter.com/dAeKweDMgW — Martin Lewis (@MartinSLewis) January 29, 2025
And Paul Barham, Tax Partner at Forvis Mazars says that many are using the allowances up until any rule changes to Inheritance Tax (IHT) occur: "Pensions can be a valuable tool when passing down wealth because they sit outside your estate for IHT purposes and as of April 2023, the lifetime allowance has been removed, so there is no limit on how much you can save over your lifetime.
"If you have assets inside and out of a pension plan, you'll want to consider when to draw down from your pension and whether to also consider using non-pension assets to meet the full cost of everyday life."
He adds: "Inheritance planning is notoriously complex. But there are advantages to starting earlier than you think is necessary. Seek the support of an adviser that you trust and one that you think will have your best interests at heart. While no one really wants to think about the need to pass on wealth, it can be of great benefit to your loved ones to get plans in place early."
Recommended reading:
Any changes - even if they only hit the wealthiest taxpayers - have not been popular with the Conservatives. Speaking to reporters on the Isle of Wight, leader Kemi Badenoch said: 'Unemployment is up, growth is down, inflation is up, cost of living is putting a real squeeze on people's pockets.
'And it's because of Rachel Reeves's budget last year. I'm very worried about what's going to come in the next budget.
'We're seeing tax rises, even taxes on pensions, as potential solutions'
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Scotsman
9 hours ago
- Scotsman
The Unaware Millionaire
Andrew Zanelli | Supplied Ordinary families are sleepwalking into an inheritance tax shock, says Andrew Zanelli, head of technical engagement at Aberdeen Adviser Sign up to our Scotsman Money newsletter, covering all you need to know to help manage your money. Sign up Thank you for signing up! Did you know with a Digital Subscription to The Scotsman, you can get unlimited access to the website including our premium content, as well as benefiting from fewer ads, loyalty rewards and much more. Learn More Sorry, there seem to be some issues. Please try again later. Submitting... Meet Alan and Margaret Thompson, a couple in their mid 60s living in Edinburgh. Neither of them would ever describe themselves as wealthy. They've always lived modestly, worked hard, saved sensibly, and raised their two children in the same four-bedroom home they bought 15 years ago for £300,000. Today, that home is worth £700,000. It's a number they rarely think about. Advertisement Hide Ad Advertisement Hide Ad Like many people in the UK, the Thompsons have quietly become 'secret millionaires'. Now, to be clear: Alan and Margaret aren't real. Their case is fictitious and all the details are illustrative only. But it's all based on the very real circumstances of thousands of families across the UK. Their story is typical of the growing number of people who, without realising it, are heading toward a significant inheritance tax (IHT) liability. Alongside their home, the Thompsons have £80,000 in valuables, furniture, and cars. They've saved £150,000 in ISAs over the years, have £20,000 in a building society account, £100,000 in an OEIC, and a £150,000 onshore bond that came from an inheritance from Alan's late parents. Altogether, their estate adds up to £1.2 million. Still, they don't feel rich. More importantly, they've never considered they might have a problem with IHT. But they do. And they're far from alone. The growing IHT trap IHT used to be something that affected only the very wealthy. But with rising house prices, frozen tax thresholds, and a lack of financial awareness, more and more families are now facing unexpected six-figure tax bills. Here's how things might play out for the Thompsons. Advertisement Hide Ad Advertisement Hide Ad On the first death, Alan and Margaret have mirror wills in place, so everything passes to the surviving spouse. Thanks to the inter-spouse exemption, no IHT is due at that point. They also benefit from the transferable nil-rate band of £325,000 and the residence nil-rate band of £175,000, which can also be passed on to the surviving spouse. That means when the second partner dies, the estate will have a total IHT allowance of £1 million. However, the Thompsons' estate is worth £1.2 million. That means £200,000 is taxable at 40 percent, resulting in an IHT bill of £80,000. And that's without any major changes in asset values or further savings. And still, the Thompsons wouldn't describe themselves as wealthy. But HMRC certainly would. How to avoid the shock Advertisement Hide Ad Advertisement Hide Ad The good news is that with the right planning, much of this tax can be avoided or at least significantly reduced. 1. Get a proper valuation of your estate: Too many people underestimate their estate's value. Take the time to list everything: your property, savings, investments, personal possessions, and any life cover. You may be surprised by the total. 2. Use trusts and life policies wisely: A life insurance payout can tip an estate over the IHT threshold. But if written in trust, it can sit outside the estate and be used to help pay any tax due. This provides liquidity for beneficiaries without increasing the estate's liability. 3. Start early with gifting and legacy planning: You can gift up to £3,000 a year tax-free, and larger gifts may also be exempt if you survive seven years after making them. Planning ahead lets you gradually reduce the size of your taxable estate. Don't wait until it's too late Advertisement Hide Ad Advertisement Hide Ad The Thompsons may be fictional, but their situation is not. Across the UK, people who never considered themselves wealthy are leaving behind avoidable tax burdens to their loved ones simply because they didn't realise what their assets were worth.
Daily Mirror
11 hours ago
- Daily Mirror
Man's Universal Credit payments stopped because of what stranger did
Ryan-Jay Walsh received a message to say he wasn't getting his £1,300 A man says his Universal Credit payments were stopped after a complete stranger accidentally used his National Insurance number when starting their new job. Ryan-Jay Walsh says he's been unable to work since November 2024 due to a medical condition. The 30 year old, from Hyde, Tameside, has been receiving Universal Credit since then, having had multiple operations. He's waiting for a final procedure. He told the Manchester Evening News he typically gets his payment - roughly £1,300 - on the ninth of each month When no pending transaction showed up by August 7, Ryan said he began to worry. He said: "I went on the Universal Credit portal and it said 'your employer has quoted that you earned £3,650'. I didn't sleep all night. I was stressing about the bills, calling relatives. I was really upset. "I was getting all these notifications saying 'payment declined', 'payment declined'. It's been incredibly stressful, not knowing where this money is coming from and if it's coming back at all." Ryan said he phoned for assistance on Friday, August 8, and was informed he'd been registered as a worker at a firm he'd never heard of. He said that when he contacted the company, bosses were also 'quite confused'. "They confirmed that no-one matching my name has ever worked there," he added. Ryan said the company discovered a new employee's National Insurance number had been entered incorrectly. He continued: "They had a National Insurance number that was different by only one digit and it was inputted incorrectly." The firm, he said, provided him with evidence and offered to contact HMRC on his behalf. Ryan said he was told 'it was a waiting game and that investigating the issue could take months'. He said: "I said 'no, that's not good enough, that's despicable'. "I don't know how they can expect someone who relies on Universal Credit to accept that. What am I supposed to do for money? I've got bad anxiety, so I just kept thinking the worst. "It could lead to me getting evicted. I provided them with all the evidence and they just told me to wait. It's had a massive impact on my mental health as well as my physical health. I've had sleepless nights, just stressing and chasing everybody up." Ryan received a message on the Universal Credit portal on Tuesday (August 12), acknowledging there had been a mistake. He said: "It acknowledged that I was owed money and said my employment status would be altered, and that I'll be paid on the 14th. I'm definitely relieved, but will feel more secure once I have received the payment and paid my bills. "I'll have to pay late fees on those now too. But it's a massive weight off my shoulders. Even if it is just a mistake of one digit, it should have flagged up on the system that the employee's name didn't match mine. It should have been noticed earlier." A spokesperson for the Department for Work and Pensions (DWP) confirmed that Ryan will receive a payment on August 14 and that the issue had been 'swiftly resolved' following an 'administrative error'. HMRC has been approached for comment.
Daily Mirror
12 hours ago
- Daily Mirror
Millions of workers to face major tax changes within months
HMRC has confirmed that the Making Tax Digital (MTD) for Income Tax changes will apply to sole traders and landlords, and will require them to use digital record-keeping to record their income tax Major tax changes are on the horizon for self-employed Brits from HM Revenue and Customs (HMRC) next year. Sole traders earning over £50,000 will soon be required to use the Making Tax Digital (MTD) service to record their income tax. The tax shake-up, set to kick off from 6 April 2026, will push more workers towards digital record-keeping. With an estimated 4.4 million self-employed individuals in the UK, it's anticipated that sole traders and landlords - who will also be impacted by the changes - will find submitting their tax returns less time-consuming. HMRC predicts around 780,000 self-employed people and landlords will need to adopt MTD for Income Tax from April 2026, with a further 970,000 joining from April 2027. Officials suggest that quarterly updates included in the system will spread the workload more evenly throughout the year, bring the tax system closer to real-time reporting, and help businesses manage their finances and avoid the last-minute scramble when it comes to filing their tax returns. James Murray MP, Exchequer Secretary to the Treasury, has thrown his weight behind the Making Tax Digital (MTD) initiative for Income Tax, hailing it as a crucial part of the government's strategy to improve the UK's tax system and boost economic growth, reports the Express. He stated: "MTD for Income Tax is an essential part of our plan to transform the UK's tax system into one that supports economic growth. By modernising how people manage their tax, we're helping businesses work more efficiently and productively while ensuring everyone pays their fair share." He further elaborated on the significance of the new system, saying: "This is a crucial step in this government's decade of national renewal and our Plan for Change, as we clear away barriers that hold back growth." Craig Ogilvie, HMRC's Director of Making Tax Digital, weighed in on the sweeping changes, remarking: "MTD for Income Tax is the most significant change to the Self Assessment regime since its introduction in 1997. It will make it easier for self-employed people and landlords to stay on top of their tax affairs and help ensure they pay the right amount of tax." More information on how MTD will impact sole traders can be found here..
