Major changes have been announced to employers’ national insurance and inheritance tax (IHT) in Chancellor Rachel Reeves’ first Budget, as key opportunities remain for businesses to take advantage of regarding their employee benefits.
From April 2025 employers’ national insurance contributions (NICs) will rise by 1.2% and the secondary threshold will be reduced to £5,000. Employers’ NICs are currently 13.8% on earnings above the secondary threshold, which will rise to 15%, and this secondary threshold, the level at which employers start paying NICs, will be reduced from £9,100 a year to £5,000. Employee NICs will remain unchanged at 8%, or 2% at the higher rate.
Much of the rumoured changes such as the reinstatement of the Lifetime Allowance (LTA), reduction of tax-free cash withdrawals, increased insurance premium tax (IPT) and the introduction of employers’ NICs on pension contributions were not announced on Budget Day. Instead, one of the key changes announced was an increase in employers’ NICs. The result is that from April 2025 businesses will be paying more NICs and on a greater portion of wages. Employers’ NICs however, are not required on any portion of salary exchanged for the purpose of an enhanced employer pension contribution.
We also saw changes announced to the National Minimum Wage, currently £11.44 for 21 and over, increases from April 2025 by 6.7%, and by 16% to £10 for workers aged 18 to 20.
Employers, therefore, might want to think about alternative funding mechanisms for their pension schemes through the implementation of salary exchange. For many employers who already contribute using this method, attention will be required to their existing communication and administration processes to ensure continued compliance.
In addition to the changes announced, from April 2025 the employment allowance will increase from £5,000 to £10,500. This will provide some protection to eligible small business from the employers’ NIC increase.
Most unused pensions and death benefits to be included within the value of a person’s estate for inheritance tax.
From April 2027 the Government will bring unused pension funds and death benefits payable from a pension into a person’s estate for inheritance tax purposes.
Pension and death benefits do not currently form part of an individual’s estate for the calculation of inheritance tax. With the existing death benefits rules, if an individual dies before the age of 75 they are usually paid to the recipient tax free. If the individual dies post 75 the inherited pot is taxed at the recipient’s marginal income tax rate. From April 2027 most unused pensions and death benefits will now be treated as being part of the estate for inheritance tax purposes. The responsibility for reporting and paying any inheritance tax liability will sit with scheme administrators.
As pension funds continue to grow and become a significant part of an individual’s personal wealth, this change will bring more individuals into the inheritance tax net. This requires greater consideration by the member of when and how they choose to crystalise their pension pots.
Employers might also need to review the design of their Group Life scheme set up and treatments of death benefits.
As always, the devil will be in the detail with consultation on the topic to run until January 2025.
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