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Pensions 'prepare now' alert as new 40 per cent tax looms

There are several things you can do to reduce your tax liability

[A woman checks her finances]

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Pension savers have been warned they face a new tax(Image: Getty)

Families have been urged to review their pensions as they face a new tax burden. Now is the time to begin planning, as many people will soon be subject to a 40 per cent levy.

From April 2027, the scope of inheritance tax will be broadened to include unused pension funds. The substantial 40 per cent tax applies to the total value of assets inherited, above certain allowances. A Government document has outlined that "personal representatives" will be responsible for settling any tax owed on pension funds and pension death benefits when these assets are passed on.

Pensions specialist Hannah Martin, founder of www.richretiree.com, has encouraged people to plan proactively ahead of the new tax bill.

She urged: "Whatever you decide to do, it's important to get good financial advice and get a full picture of your position early, so you can prepare well in advance." She said that the changes will undoubtedly influence how people manage their finances.

Changing plans

The expert said: "This will have an impact on how people plan their finances, and how 'tax efficient' they view pensions, and the plans they make." Ms Martin said that the new tax may encourage people to draw down from their pensions sooner, or to look more to ISAs as a means of building their savings, given that these accounts are entirely free from tax.

Each person can pass on up to 325,000 in total assets free of inheritance tax, with an additional 175,000 allowance if you are leaving your primary residence. Any unused allowances can be transferred to your spouse or civil partner, meaning they could potentially pass on up to 1million tax-free upon their death.

Ms Martin said that pensions becoming subject to the tax may also encourage people to make more gifts to their family members, in order to reduce their inheritance tax liability. You can give away up to 3,000 per tax year tax-free, split however you want among any number of recipients.

You can separately give away any number of gifts worth up to 250, to different individuals. You can also make tax-free gifts from your regular income.

Other tax changes from next year

However, if you are considering increasing your ISA deposits, there are further rule changes to be aware of from April 2027. You can currently deposit up to 20,000 each tax year into these accounts, split as you see fit between cash ISAs and stocks and shares ISAs.

From next year, however, you will only be able to allocate 12,000 of the allowance as you choose, while the remaining 8,000 will be restricted to investment-based accounts only.

Another tax change from April 2027 worth bearing in mind is that the rate you pay on your taxable interest earnings will rise, with each tax rate for this increasing by two percentage points. Basic rate income taxpayers will see their rate rise from 20 per cent to 22 per cent, while higher rate taxpayers will face an increase from 40 per cent to 42 per cent.

Those on the additional rate will see their rate climb from 45 per cent to 47 per cent.

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