State pension teeters on £12.5k tax threshold
The annual state pension is likely to rise by 4.7% next year under triple lock rules bringing pensioners within £35 of basic rate tax threshold
The rise is down to the triple lock which means the state pension is tied to the highest of average earnings growth, inflation or 2.5%. The latest ONS figures showed 4.7% earnings growth including bonuses for May to July 2025.
The government has not yet confirmed the 2026-27 increase for pensioners, but this is usually confirmed in the autumn and it is committed to maintaining the triple lock.
A 4.7% increase would see the ‘new’ state pension rise to £12,534.60 a year, just below the frozen basic rate tax threshold of £12,570, meaning millions of pensioners will be perilously close to paying tax assuming they have no other earnings.
Those earning the old state pension would not be affected as their base pension is so much lower at £9,607 per year.
Nigel Green, chief executive of global financial advisory deVere Group, warns that the headline increase masks a serious problem.
‘The state pension is now almost level with the personal allowance,’ he said. ‘Any private pension income, savings interest or taxable benefits will push people over the threshold. Many who have never paid tax in retirement will soon find themselves in HMRC’s sights.’
With the allowance frozen until at least 2028-29, the triple lock is creating a tax nightmare. Before the general election, the Conservatives said they would introduce a special tax threshold for pensioners, but the current chancellor Rachel Reeves has never addressed the potential problem.
HMRC figures already show about 8.5m pensioners pay income tax, up from 7.8m just a year ago.
Green warned: ‘If nothing changes, the state pension will overtake the personal allowance entirely within a few years. That would make every pound of additional income taxable for millions.’
The tax problem raises further questions about the long-term sustainability of the pension triple lock, long criticised as a distorted measure and more of a politically driven factor to draw in pension age voters. With the Labour government’s removal of the winter fuel allowance for the majority last winter, albeit the chancellor u-turned on the policy, it will be interesting to see whether there are any moves to address this issue before next year’s Budget.
in March, the Office for Budget Responsibility (OBR) projected that the state pension budget will rise to £182bn billion by tax year 2029-30.
Rachel Vahey, head of public policy at AJ Bell, said: ‘This poses a significant conundrum for Rachel Reeves and the Treasury. If the triple lock sees the state pension increase above the personal allowance for the first time, then the government will come under increasing pressure to make a decision regarding either the personal allowance or whether it can sustain the triple lock.
‘Removing the freeze on the personal allowance would come at significant cost to the Treasury at a time when the chancellor’s fiscal headroom is already strained at best, while an overhaul of the triple lock would come with huge political risk before the next general election.’
The state pension age will gradually increase to age 67 between 2026 and 2028, and it is due to rise to 68 in the mid-2040s, although this could be brought forward to the 2030s.
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Just 10% of businesses positive about Employment Rights Bill
As the Employment Rights Bill edges closer, nearly two thirds of businesses say the proposals will have a negative impact with concerns about costly changes to statutory sick pay and day one rights
The latest survey from Peninsula has shed light on the real views of businesses and how they believe the new employment rules will impact them.
Just 10% of the businesses surveyed believe the Employment Rights Bill would have a positive impact on their organisation, while 68% said it would have a negative impact.
Kate Palmer, employment services director at Peninsula, said: ‘Clearly businesses are incredibly concerned about the impact the Employment Rights Bill will have. The chancellor’s hike in employer national insurance contributions (NICs) had a crippling effect on many, with more small businesses closing their doors than ever before.
‘And with increased national minimum wage, the day one right to statutory sick pay and paternity leave, changes to tipping laws and the removal of lower earnings limits to come, this financial pressure is only going to increase.’
Across the country many businesses are adamant the day one right to paternity leave will have a negative effect with 42% saying this in the east of England and around the same number sharing this view in Yorkshire and the Northwest.
However, there is a regional divide with many London based businesses (39%) saying the day one right to paternity leave would be a positive development against only one in five viewing it as negative.
The most unpopular measure in the Bill was the new day one right for employees to claim unfair dismissal with nearly two thirds (62%) of respondents against this move.
Despite the widespread use of hybrid working, a vital tool in staff retention, nearly half (47%) viewed the introduction of flexible working as the default as a negative move, followed by 42% concerned about the changes to statutory sick pay (SSP), which will see SSP paid from the first day of sickness, instead of after three days as currently.
Two thirds of the respondents claim these changes will increase their administrative burden and increase operating costs. By the government’s own estimates the cost of implementing the measures in the Bill will be in the region of £5bn to businesses annually.
It is not all negative though as some changes that are coming are welcomed by most, as 58% of respondents said the enhanced protection against sexual harassment will be a positive change.
Those most concerned about the upcoming Bill were businesses with between 21 and 50 employees with 68% of them saying they were worried about the impact.
Some companies are already taking steps to prepare for the changes, with 13% saying they have hired internal experts for the very purpose of preparing for the Bill, while more than half have approached external HR advisors for help.
However, over half of the respondents had not yet done anything about the upcoming changes while only around 5% of businesses had set aside budget to pay for compliance with the Bill.
Palmer said: ‘These changes are coming whether businesses like them or not, so preparation is key.
‘Just over half the businesses we surveyed have started to plan for the implementation of the Bill, with only 12% stating that they feel “very prepared”.
‘Those without internal HR knowledge should seek advice to ensure they stay ahead of all the incoming changes, keeping policies and processes up to date with all latest legislation and reducing the risk to their business.’
The first measures in the Employment Rights Bill, still to be given Royal Assent, are due to come into force next April, only eight months away.
From 1 April 2026, the rules on eligibility for statutory sick pay change. It will have to be paid from the first day of absence, instead of the fourth day as it is currently, and low earners will become entitled to SSP as the lower earnings limit is removed, increasing costs for employers. Paternity and parental leave will become a day-one right. Employees will therefore no longer need a minimum amount of service to take this time off. Relevant policies will have to be amended, and managers will need to told to ensure employees are not unlawfully denied their right to these types of leave.
Later in the year, in October, sweeping changes to fire and re-hire come into effect, while there will also be a new requirement for employers to provide a statement to employees, alongside the employment contract, detailing their right to join a trade union.
The laws on sexual harassment will also change, with employers required to take ‘all reasonable steps’ to prevent sexual harassment of their employees and the introduction of an obligation on employers not to permit the harassment of their employees by third parties.
This goes further than the proactive duty introduced in October 2024 and will mean employers must review their policies and procedures on preventing sexual harassment.
- Published in Blog Posts
Inheriting a pension, a taxing experience
As unused pension pots enter the inheritance tax orbit, Oliver Smyth, director at YorWealth, explains the implications of the changes and potential tax mitigation options
When Rachel Reeves announced large scale changes in the 2024 Budget last autumn, much of the focus at the time centred around the changes to the level of National Insurance contributions to be paid by employers.
Whilst understandably being the headline-grabbing change with economic growth being one of the many major challenges facing our economy, one of greater concern within the financial planning industry was the introduction of pension assets to an individual’s estate from April 2027.
Pensions are primarily a tool to fund an individual’s retirement however, they have also been used as a means of transferring wealth through generations.
Current defined contribution pension scheme pension rules dictate that, if death occurs before age 75, the pension can be passed on to a nominated beneficiary as a tax-free pot, to be retained as a pension investment, or drawn as an income and/or lump sum. If death occurs after age 75, the pension can be passed on subject to the receiving individual’s marginal rate of income tax on any drawings.
Is this all about to change? We understand that the following inheritance tax (IHT) regime will likely (subject to ongoing consultations) apply to defined contribution plans and lump sum death benefits from defined benefit schemes from April 2027:
- The value of these assets will be included in part of your estate in any IHT calculation.
- Pension funds inherited by a surviving spouse or civil partner will not be subject to IHT at that time. IHT could potentially apply following the death of the surviving spouse and the remaining pension passing on to children or wider beneficiaries.
- If death occurs after age 75, the fund is additionally subject to the beneficiary’s marginal rate of income tax on receipt of payments out of the inherited pension. This effectively creates an environment of double taxation, with the fund potential suffering both inheritance tax, then income tax.
- Any IHT applicable to the pension fund will need to be paid from the pension directly by the pension scheme administrator. It must be reported within two months of the death, and the bill must be calculated and paid within six months of death. Any late payment and reporting will be punishable by fines and interest by both the pension scheme administrators, as well as potentially executors of the estate.
Another unwelcome aspect of these changes is how they interact with the main residence nil rate band (RNRB), the additional relief available to those who own their own properties.
There is an additional nil rate band of up to £175,000 per individual (£350,000 for a married couple) on top of the standard nil rate band of £325,000. Though this can be an extremely valuable way to manage an IHT bill, the allowance is withdrawn by £1 for every £2 over £2m an estate is valued at.
This may seem like a large sum but considering that many people’s pensions are their largest assets outside the family home, their estate will suddenly drastically increase in value, potentially depriving them of this allowance and worsening the IHT position further.
Tax planning options
Though this all seems like an unhealthy amount of gloom, with a large side-order of doom, all is not lost. There are things that we can do to plan around these changes and ensure that your family is the primary beneficiary of your pension, rather than HMRC.
The most fundamental shift will be in how we think about pensions as a means to pass wealth down to heirs. Instead of waiting until you pass away, you will have to engage with your pension now in order to ensure that you are able to manage IHT in a more efficient way.
The following are some potential strategies you might employ in order to start dealing with what could be a difficult issue:
- Gifting out of regular income – If you are able to access your pension at a 20% tax rate but are not in need of the income, you may choose to withdraw and gift this income to your heirs directly. Pension income that is surplus to your living expenditure requirements may be gifted without being subject to the usual seven-year gifting rules associated with potentially exempt transfer (PET), thereby immediately removing it from your estate.
- Making lifetime gifts (either via trusts or as outright gifts) – For larger sums, such as tax free cash entitlements within pensions, you could elect to simply draw a large sum out and gift it, or place it within a trust for your family. This would trigger a seven-year clock, with the full value of the gift falling out of your estate following this period.
- Prioritise spouse on the nomination of beneficiary – As mentioned previously, pension asset passed to a spouse are not subject to IHT, leaving other assets potentially available to be passed on elsewhere in the estate.
- Using whole of life assurance plans placed into trust – A whole of life assurance plan can cover an individual or a couple to pay out an amount on the death of the last survivor. The amount is known as the ‘sum assured’ and this can be written to be the sum due as inheritance tax payable on the estate.
A trust is established for the sum assured to be paid into so that it never enters the estate for IHT calculations, which the executors/beneficiaries can then use to pay off the inheritance tax bill.
A further advantage to this arrangement is that the executors will not have to wait for probate to be granted to access the funds, as the insurance pays into a trust that can be immediately accessed.
The significant drawback of this planning tool is that these plans are not cheap, as they are generally purchased in later life and so the monthly premiums may not be viable in some instances.
Though more active management is required, the old quote from Lord Jenkins of Hillhead still rings (at least partially) true; ‘Inheritance tax is a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.’
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HMRC sets up bereavement service helpline
HMRC has created a dedicated bereavement service phone number and postal address to support families and representatives deal with tax issues
Bereaved customers or their representatives can call the new dedicated Bereavement Service to:
- report a death;
- settle all the deceased’s tax affairs up to the date of death, including income tax and capital gains tax (CGT) before they died;
- ask about informal administration period tax.
The helpline uses speech recognition software, so callers will be asked for the reason they are calling HMRC.
The new number will use voice response messages to direct callers to the appropriate advisers for PAYE, self-assessment or child benefit.
The helpline will be available 8am to 6pm Monday to Friday, and HMRC says it is less busy before 10am daily.
The bereavement service helpline number is 0300 322 9620 in the UK, and +44 300 322 9620 for callers from outside the UK.
HMRC said the new service ‘will ensure the customers reach the right team first time to discuss issues in a single call.
‘We will continue to route any customers that continue to use the existing numbers to bereavement advisers using the speech recognition platform.’
It is also very useful to use the gov.uk Tell Us Once service where a death can be reported to most government organisations in one go after the death is registered and the registrar issues a unique reference number to access the service. Tell Us Once is available in England, Scotland and Wales, not Northern Ireland.
The HMRC postal address for help with PAYE, self assessment or National Insurance contributions after someone dies has also been updated to: Bereavement Services, HM Revenue & Customs, BX9 2BS.
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864k landlords and self employed dragged into MTD
With just seven months to go until mandatory Making Tax Digital (MTD) for Income Tax, HMRC has confirmed that 864,000 landlords and self employed will be caught by the quarterly reporting rules from day one
The first phase of MTD for Income Tax will kick in from April 2026 requiring individuals with a qualifying income over £50,000 to file quarterly returns using software with a final year end round out. The first quarterly filing date is set for 7 August 2026 and a new penalty system for non compliance will be in force.
Initially MTD will only affect higher earners in this cohort, but quarterly filing will be quickly rolled out to a wider audience with the threshold dropping to £30,000 in April 2027 dragging in 1,077,000 individuals, then falling to a negligible £20,000 from April 2028 with another 975,000 required to report.
Around 2.9 million (42%) of which have a qualifying income above £20,000 and will need to join MTD for Income Tax, based on self assessment figures for 2023-24.
From April 2026 businesses with a qualifying income over £50,000 will need to join MTD. Based on tax year 2023-24 there are 864,000 individuals with a qualifying income over £50,000.
For many of these landlords and self employed people, the new MTD requirements will be onerous, and they will be reliant on HMRC notifications about the changes as 25% of the £50,000 earners do not have an accountant or tax adviser.
Authorised agent representation falls in line with qualifying income. For those in the £30k-50k bracket, 37% do not have an accountant, while only 41% are represented in the £20k-30k band.
Of greater concern is the very large number of people who will need to invest in software to file their MTD reutrns. Currently only half of landlords and self employed used commercial software to submit their end of year self assessment tax returns.
Not only will they be faced with a total overhaul of the tax return process, but they will also have to shell out money for software, usually charged on a monthly basis for around £20, equivalent to an annual subscription cost of up to £240 a year.
For the software providers, MTD will be an absolute winner, with a captive audience required to buy software, in most instances, to comply with the government’s MTD rules.
For those that do not want to pay for a subscription, there are some basic software options available for free, including a stripped back software offering from Sage called Sage Accounting Individual Free, which is described as ‘ideal for freelancers with straightforward accounting needs’ and was launched in 2023.
When asked whether this would always be free, the company said ‘it was committed to offering a free digital tax solution’, but stressed that it was scalable as requirements became more complex for the customer.
Neal Watkins, EVP, small business at Sage, said: ‘We see this as a milestone that will enable businesses to focus more time on growth and we are committed to play our part by providing a free software tool that will help them spend more time on growing their business.’
At the same time, 37% of £50,000 plus individuals did not use software to submit their end of year return for 2023-24 meaning they will have to invest in software to file their quarterly returns, adding to business costs.
Going down the earnings scale, use of software drops off, with only half of the £20k-£50k bracket using software to file their tax returns.
Software use is much higher for those who have authorised agent representation. For businesses with an authorised agent and over £50,000 qualifying income, 78% used commercial software to submit the end of year return, while only 21% for those without an authorised agent.
Number of self employed and landlords under MTD for Income Tax
| Qualifying income £ | Total | Start date |
| Up to £10,000 | 2,429,000 | Not yet |
| £10,000.01 to £20,000 | 1,674,000 | Not yet |
| £20,000.01 to £30,000 | 975,000 | 06 April 2028 |
| £30,000.01 to £50,000 | 1,077,000 | 06 April 2027 |
| Over £50,000 | 864,000 | 06 April 2026 |
| Total | 7,020,000 |
Source: HMRC
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