- First year of Labour government sees Chancellor Rachel Reeves introduce a number of tax raising measures, including increased rates of CGT on investors and proposals to subject pensions to inheritance tax (IHT)
- Pension IHT is the most unpopular of the key tax raising measures announced over the last year, new polling from AJ Bell and Opinium shows*
- Just a fifth of voters support the proposals, which AJ Bell has warned will create financial gridlock for bereaved families and result in unfair rates of taxation on inherited pensions
- Other measures like increasing employer NI are also widely opposed, although some tax raising measures have net support
Subjecting unused pension funds to IHT on death is the most unpopular tax raising measure announced by the government since entering office, new research shows*.
Pension IHT proposals are the most heavily opposed of the government’s key tax raising measures announced in its first year in office, with just a fifth of Brits (21%) saying they support the policy, due to come into force from April 2027, while 44% say they’re against the government’s plans.
AJ Bell has warned that the current proposals are likely to result in significant delays and complication in the inheritance process for bereaved families, while subjecting some to punitive rates of taxation. The business has called on the chancellor to consider alternatives, including extending income tax on pensions to all beneficiaries.
Other measures were also strongly opposed, including the decision to raise employer national insurance, with 41% against the tax rise and just 24% in support. Raising rates of capital gains tax (CGT) and restricting IHT relief available to farmers were also unpopular.
Several tax raising policies attract net support, however, with 48% in favour of raising the rates of stamp duty on second homes.
AJ Bell director of public policy, Tom Selby, comments:
“Labour marked a year in office with a tumultuous week in parliament. Rachel Reeves inherited an extremely challenging situation when she entered the Treasury and the week’s events illustrate the task has not grown any easier.
“Having committed before the election not to raise taxes on workers and putting the headline rate of income tax, VAT and national insurance off limits, government has taken a piecemeal approach to tax rises, increasing taxes on employers, investors and pensioners in the process.
“This data shows tax rises of every shade are divisive. While some tax increases attract a balance of support, they still divide the room. Nothing that emerged from Rachel Reeves’ red box over the last year enjoys support from a majority of voters, illustrating that even less controversial tax changes are still politically fraught.
Pension IHT
“IHT is often described as the most hated tax and this data backs that up. Proposals to subject unused pensions funds to IHT on death are the most widely opposed of all the tax raising measures announced so far.
“It’s not hard to see why individuals object to widening out the net of inheritance tax to catch pensions, perhaps resenting that their loved ones may be asked to pay tax twice on inherited pension funds – once through inheritance tax, and again via income tax.
“This potential double whammy of taxation will be seen as unfair by some, and could put off people saving in pensions in the first place or encourage others to run down pension pots, leaving themselves with little to live on in later years.
“The proposals set out by government create huge complexity and will delay families from accessing money in a timely fashion following a bereavement. In some cases the proposals will be unworkable and will create financial gridlock in the probate process, especially where assets held in the pension can’t be sold quickly.
“We’re urging the chancellor to instead consider alternative proposals which would be fairer and simpler, without undermining her plan to tax unused pensions on death.”
What the nation thinks of tax raising measures
Source: AJ Bell/Opinium. Data from 2,050 UK adults weighted to be nationally and politically representative.
AJ Bell opposes pension IHT plans
Government plans to introduce an IHT liability on unused pension assets on death from April 2027.
The proposals mean any unspent pension assets on death will be treated as part of the individual’s estate and may be subject to IHT.
Once passed to the beneficiary, income withdrawn from the pension can then also be subject to income tax at their own marginal rate.
The double taxation proposed means that pension assets will be subject to a 64% effective tax rate on death where the pension pot exceeds the IHT nil rate band and the beneficiary is a higher rate taxpayer. In many cases it will be far higher.
In addition the plans will cause significant delays distributing money to families on death and in some cases may prove unworkable.
Pension schemes will be required to engage with the personal representative (PR) of the deceased scheme member. PRs will need to identify all pensions that were held in the individual’s name and determine how much of their IHT nil rate band should be apportioned to the scheme or schemes. This will cause inevitable delays, particularly where no will exists, and in many cases PRs will not be able to complete the process within the required six-month window.
Liquidity also presents a major challenge under the current proposals. Pension funds holding illiquid assets will often struggle to sell these within six months.
AJ Bell is instead calling on the chancellor to explore alternative measures put forward by the industry as part of the consultation process.
The business has suggested two options, which it believes would be simpler and fairer:
- ISAs are already subject to IHT on death. This provides a pre-existing template for the reform of pension taxation on death and would mean investments are treated equally as part of the estate.
- Income tax applied on withdrawals at the marginal rate of the beneficiary represents another simpler alternative. This offers a fair system in which those inheriting pensions with the highest incomes pay more tax, while also offering simplicity given pension assets are already subject to income tax where the member dies after age 75.
Timeline
October 2024: Chancellor announces at the Autumn Budget plans to introduce IHT on unused pension funds on death
November 2024: AJ Bell writes to chancellor to urge government to reconsider its proposals.
January 2025: CEOs of AJ Bell, Hargreaves Lansdown, Interactive Investor and Quilter write jointly to the chancellor outlining objections to the current proposals as the consultation period closes.
Summer 2025: Further updates are anticipated in summer 2025, with government expected to publish its consultation response and draft legislation
April 2027: Proposed implementation of government proposals
Government tax raising measures
- Capital gains tax
CGT rates were increased in the Autumn Budget in October last year from 10% to 18% for basic-rate taxpayers and from 20% to 24% for higher and additional-rate taxpayers, effective immediately.
- Employer NI
Employer national insurance was increased from 13.8% to 15% and the secondary threshold (the level of salary at which employer NI begins to apply) cut from £9,100 to £5,000 and frozen until April 2028.
- Private school VAT
From January 2025 government removed the VAT exemption for private schools.
- Pension IHT
Not due to come into effect until 2027, the consultation on the government’s proposals closed in January. The proposals mean any unspent pension assets on death will be treated as part of the individual’s estate and may be subject to IHT.
Once passed to the beneficiary, income withdrawn from the pension can then also be subject to income tax at their own marginal rate.
- Non-dom status
Abolished the non-dom system allowing individuals not domiciled in the UK for tax purposes to pay no UK tax on overseas earnings. A flat fee of £30,000 or £60,000 applied.
The system was replaced, with taxpayers subject to UK tax on foreign income and gains once resident in the UK for four years.
- Second home stamp duty
Stamp Duty increased from 3% above the standard residential rate to 5% above the standard rate.
- Winter fuel
Government will tax pensioners with incomes over £35,000 in order to recover the winter fuel payment
- Agricultural IHT relief
Farms subject to increased IHT by restricting the full 100% rate of relief from inheritance tax so that it only applies to the first £1 million.
*Data collected by Opinium on behalf of AJ Bell between 27-27 July 2025. Sample of 2,050 UK adults weighted to be nationally and politically representative.
