Comment: UK Budget drags more people into scope of IHT

The big freeze

Extending the freeze on all tax thresholds for not just two years (as advertised) but for three (until 2031) does a number of things for the Government: on the flimsiest of technicalities Labour keeps its manifesto pledge, yet the amount of tax paid by workers will result in an increase in treasury revenues as inflation drags people into higher brackets. While more working people become higher-rate taxpayers, more and more individuals will also be dragged into the scope of Inheritance Tax (IHT) with the nil-rate bands frozen until 2031.

What didn’t happen in pensions

There was fervid speculation about a ‘raid’ on pensions in the months of budget lead-up. Rumours about a cap on tax-free cash caused the most speculation and dread. Statistics released by pension providers already show an increase in outflows over the past months. While some of these withdrawals will have been actioned as part of a broader financial plan, it’s highly likely that many people will now have cash sloshing around outside its pension wrapper and they will not be able to put it back. You could say that this was a dog that didn’t bark in the budgets of either 2024 or 25: I suspect that by next autumn we’ll be wondering once again if 2026 will be the year it will find its voice.

And what did

But some significant things did happen in pensions. Unsurprisingly, the state pension increased by 4.8% in accordance with the triple lock, bringing the annual payment to £12,547.60 – just below the personal allowance of £12,570. From April 2027, this income will use the personal allowance before any dividend, rental or savings income ensuring that income tax is not levied on the state pension.

As anticipated, salary sacrifice became the sacrificial lamb in the pensions sphere: from April 2029 salary sacrificed pension contributions above an annual £2,000 threshold will no longer be exempt from National Insurance contributions. The change will hit employers harder than employees owing to the difference in contribution rates (15 per cent for employers vs 2 per cent for higher-rate tax payers). It is estimated that this will raise £4.7bn but the long lead-in may lead to firms restructuring their pay and pensions to mitigate this new charge.

Change to the ISA allocation

It’s no secret that the government would like to see money paid into Cash ISAs invested instead, so the change in the way the annual £20,000 ISA allowance is allocated comes as no surprise really. From April 2027, only £12,000 can be paid into a cash ISA and the remainder must be paid into an investment ISA. The over-65s retain the full cash ISA allowance. There’s not much to shout about here: this seems broadly sensible and should bring better returns for those with longer investment horizons. A consultation period on the Lifetime ISA (LISA) is also announced for 2026, which is likely to bring changes to savings incentives for first-time buyers.

The confirmation that the £1m IHT allowance on Business and Agricultural Property is transferable between spouses and civil partners brings clarity and enables £2m of relief to be rolled over. The threshold is still sufficiently low to be punitive for family farmers but will make planning more straightforward.

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