The UK Budget has ushered in significant changes to pensions, with far-reaching implications for employers. Key adjustments focus on the inclusion of unspent pension pots in inheritance tax (IHT) and increased employer National Insurance Contributions (NICs), compelling businesses to reassess pension schemes and compensation strategies.
Inheritance tax overhaul
Starting April 2027, unspent pension pots and death benefits will be included in a deceased individual's estate for IHT purposes. This measure closes a previous loophole that allowed pensions to bypass IHT, often used as a wealth transfer tool. While survivor pensions for spouses and civil partners remain exempt, defined contribution (DC) and defined benefit (DB) schemes will see lump-sum death benefits face increased tax liabilities.
Employers are urged to review death benefits, potentially transitioning to excepted group life policies to reduce IHT exposure. Additionally, pension scheme administrators must now calculate and pay IHT, introducing new administrative demands.
Increased National Insurance contributions
From April 2025, employer NICs will rise from 13.8% to 15%, coupled with a reduction in the NIC threshold from £9,100 to £5,000. This dual increase will significantly impact employers' payroll costs.
To mitigate this burden, businesses may consider salary sacrifice arrangements, allowing employees to redirect a portion of their salary into non-cash benefits like enhanced pension contributions. This strategy could reduce NIC liabilities for both employers and employees while preserving competitive compensation packages.
Administrative and structural adjustments
The new IHT framework adds administrative complexity, requiring employers to reassess pension scheme structures. Transitioning to master trust arrangements or engaging professional administrators may be necessary to streamline compliance. The inclusion of lump-sum death benefits in IHT calculations further underscores the need for careful planning and potential restructuring of registered pension schemes.
Strategic and long-term planning
Employers must remain vigilant as further regulatory changes are anticipated. Staying informed and engaging with legal and financial advisors can help organisations navigate this shifting landscape. Proactive communication with employees about the implications of these changes is critical, ensuring they understand adjustments to pension benefits and how these impact their retirement planning.
Employers should also evaluate technological solutions to handle increased administrative demands and consider long-term strategies to maintain competitive, compliant pension offerings.
The UK Budget’s changes to pensions represent a pivotal moment for employers. By adapting to these reforms, businesses can manage their financial and administrative impacts while supporting employees in navigating the evolving pensions landscape.
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