ISA, PENSION & INHERITANCE TAX

ISA  AND  THE CHANGES   STARTING FROM APRIL 2027 & PENSION AND INHERITANCE TAX

A New 22% Flat Tax on Uninvested Cash in stock and share ISAs

HM Revenue  & Customs will impose a 22%  levy  to counter savers attempting to circumvent the new ISA rules, effectively:

• A flat 22% tax charge  [ The new increased tax rate on savings and unearned income ]  will be levied on all interest earned from uninvested cash balances held inside Stocks and Shares ISAs.

• This is to prevent savers to leave cash above  the £12,000 annual   cash ISA allowance uninvested and earn interest.

From April 2027, those under 65 will only be able to put £12,000 into a cash ISA in each tax year.  The  remaining balance of £8,000  must be invested in Stocks and shares, making a total of £20,000.

Until  5 April 2027 you can put up to £20,000 into either a cash ISA or a stocks and shares ISA ,in any combination  without paying UK income or capital gains tax on the money you earn. 

Savers  aged 65 and over will still be able to put all of their annual £20,000 allowance into a cash ISA, without  a penalty.

The Chancellor wants to encourage people to invest rather than just saving their money with a view to  benefit companies and engender economic growth.

No changes have been made to junior ISAs (JISAs), their allowance remains at £9,000 each tax year per child.

Just like with any investment your money can go up or down.

Tax increase on unearned income

Capping  the national insurance exemption for paying into pensions

From April 2029 there will be a £2,000 a year limit on the amount you can add to your pension via a ‘salary sacrifice’ scheme employer national insurance is applied, expected to be at  2% above £2,000.

The salary sacrifice operates as an employer contribution, where part of your salary is not paid to you but paid into your pension scheme, before tax and national insurance.

Tax-free pension lump sum unchanged

You are entitled to make a tax-free lump sum withdrawal of up to 25% of your pension if you  are 55 years old or over  and  57 from  2028. The maximum cap is  £268,275.

INHERITANCE TAX AND YOUR PENSION POT

Pension is no longer an effective tool for estate planning

From 6 April 2027 most unused pension  funds will be subjected to Inheritance tax (IHT) at  40% on death arising from  that date [FA 2026 SS 66-71].

The legislations will apply  to Defined Contribution Pensions with the following exemptions:

• Dependent scheme pension

• Death in service  benefits

• Life insurance/ annuities

The Pension Scheme Administrator [PSA] can be held liable  for payment of Inheritance Tax. Under IHTA s.226B  the personal representative  can issue a  notice  to the PSA  to pay the IHT , which the PSA must pay in 35 days.

What can someone  do in  an attempt to reduce their exposure:

1. Spend

2. Gift  , using annual exemption

3. Use spousal exemption

4. Review Resident Nil  Rate band  ( the £175,000 additional exemption on passing the house to direct decedents). The RNRB is tapered for estate of £2m and above.

5. Review assets  that will  be eligible for Business Property Relief and Agricultural Property Relief. An individual holding a qualifying asset ( including qualifying shares)   can benefit from £2.5m exemption before Inheritance tax is applied, at the reduced rate of  20% above £2.5m.

6. Gift out of surplus income IHTA 1984 s21.

7. Potentially Exempt Transfers ( PET) – a  gift that can fall out  your estate if you survive 7 years. Note that  gift  of an asset which is liable to Capital Gains Tax will trigger a tax charge for an outright gift.

8. Draw on your pension as far as possible ( especially within the basic rate bracket ) and reserve  other assets to pass to children.

Buying an annuity may help  to take the pension pot out of the estate. This very much depends on the  value being transferred out and life expectancy as any unused part of the pot will be lost.

In any event caution should be exercised as  the income tax at marginal rate on the pension  may  negate the benefit of the inheritance tax saving.