What does the expansion of tax-free pension allowances mean for IHT?

The abolition of the Lifetime Allowance (LTA) and the £20,000 increase to the Pension Annual Allowance in the Spring Budget, make this the perfect time to talk to your clients about Inheritance Tax (IHT) and the passing on of pensions.

What is the new post Budget rule on pensions?

The charge for the £1.07 million LTA, which dictated the tax-free amount a person could save into their pension pot, will be abolished from April – and the allowance scrapped altogether from April 2024.

In addition, the amount that an individual can save into their personal pension each year, known as the Pension Annual Allowance, will increase from £40,000 to £60,000 at the same time.

How can your clients use the new pension rules to offset their IHT liabilities?

When passing on a pension pot, Inheritance Tax typically does not apply, unlike other investments, as it is typically not considered part of a taxable estate.

The abolition of the LTA means a potentially unlimited amount of money can be placed in a pension pot tax-free, while the expansion of the annual allowance means savers can grow their pot by £60,000 a year without a tax charge.

Just be aware that the annual allowance can be tapered away if a person has a high income, meaning both their:

  • ‘threshold income’ is over £200,000
  • ‘adjusted income’ is over £240,000

At MGI Midgley Snelling LLP we are able to explain IHT and the new pension rules to your clients in terms they will understand and help them with their tax affairs.  To find out more, please contact us. 

Posted in Legal Bulletin.