Autumn Budget 2024: Key Pension Tax Changes and Rising Employer Costs Demand Strategic Planning

31 October 2024 • 4 min read

The highly anticipated Autumn Budget delivered by the Chancellor on 30 October 2024 brought minimal changes to the pensions tax regime, despite weeks of speculation. Notably, the expected reduction in employer National Insurance Contributions (NIC) relief on pension contributions was absent, as were changes to the amount of tax-free cash available at retirement.

Key Announcements Affecting Pensions

1. Inheritance Tax on Unused Pension Funds
   The most significant reform is the inclusion of unused pension funds (including death benefits) in a deceased person’s estate for inheritance tax (IHT) purposes, effective from 6 April 2027. Currently, such funds paid as lump sum death benefits through discretionary trusts are exempt from IHT. Additionally, lump sum death benefits paid from a pension scheme remain untaxed if the deceased was under 75 and the payments fall within the £1,073,100 allowance.

   From 2027, however, unused pension funds will be included in the estate and subject to IHT, aiming to ensure pensions are not used primarily for inheritance tax planning. Trustees and employers will need to review discretionary trust provisions and may need to amend pension scheme governing rules. The scope of the reform requires more clarity from the government, especially regarding its application to defined benefit pensions and standalone lump sum death benefits.

2. Increase to Employer NICs
   Employer NICs will rise from 13.8% to 15% on 6 April 2025, with the threshold for NIC payments reduced from £9,100 to £5,000 per year until 2028. This change, though not directly impacting pensions, could drive significant cost increases for sponsoring employers.

   Employers might consider altering pension contribution rates, particularly if they provide contributions above auto-enrolment minimum standards, to offset the NIC rise. Additionally, salary sacrifice schemes may remain advantageous, but employers could decide whether to continue sharing NIC savings with employees or use them to cover higher NIC bills.

Implications for Employers and Trustees

The proposed IHT changes require careful assessment of current practices and may prompt a review of the death benefit provisions within pension schemes. Furthermore, the employer NIC increase might pressure businesses to reconsider pension generosity, potentially affecting members’ retirement savings adequacy. As discussions continue around auto-enrolment contributions, the government may face pressure to address the balance between employer costs and pension provision sustainability.

Employers contemplating changes should review the governing provisions of their schemes and contractual agreements to ensure compliance.