Labour’s inheritance tax raid on pensions will hit 150,000 extra families with higher death duty bills by 2030, according to new figures.
The policy, set to take effect from April 2027, will force 31,200 families to pay inheritance tax for the first time.
A further 121,500 families who already pay the levy will see their bills increase under the changes announced by Chancellor Rachel Reeves.
The move means estates with relatively modest assets and pension savings are likely to face either new or higher inheritance tax liabilities.
Someone with a mortgage-free property worth £300,000 – just above the national average – and a pension worth £100,000 would face an inheritance tax bill of £30,000 from 2027, according to analysis by Interactive Investor. This tax liability would surge to £110,000 if the pension was valued at £300,000.
An extra 120,000 families who already pay the levy will see their bills increase
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These calculations assume the full nil-rate band of £325,000 is available, and that the additional residence nil-rate band of £175,000 – available when passing a family home to direct descendants – does not apply.
The Office for Budget Responsibility estimates that in 2027-28, the average inheritance tax liability will be £169,000, rising by around £34,000 when pension assets are included.
Currently, inheritance tax is charged at 40 per cent on estates above the nil-rate band of £325,000. Both the nil-rate band and residence nil-rate band allowances will remain frozen at their current levels until 2030.
Under existing rules, pensions inherited by beneficiaries of those who died aged 75 or older are subject to income tax at the beneficiary’s marginal rate.
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From April 2027, Labour’s new policy will include unused pension funds and death benefits in the value of an estate for inheritance tax purposes.
This means inheritance tax will be applied first, followed by income tax as beneficiaries withdraw money from the inherited pension.
The combined effect of inheritance and income tax could create a “double hit” for beneficiaries, with some taxpayers facing marginal tax rates as high as 90 per cent on inherited pensions, according to accountancy firm RSM.
Basic-rate taxpayers could face an effective tax rate of 52 per cent on inherited pension pots.
This rises to 64 per cent for higher-rate taxpayers and 67 per cent for additional-rate taxpayers.
Richard Wilson, chief executive of Interactive Investor, condemned the proposals as “an affront to people who have done the right thing”.
He warned the changes would undermine confidence in the pensions system and could drive decisions that harm long-term financial security.
He said: “The current proposals are an affront to people who have diligently invested through a pension throughout their working lives. They undermine the already fragile confidence in the pensions system and could drive decisions that undermine long-term financial security.”
Pensions were previously considered a tax-efficient way to pass on wealth, but experts warn the risk of large tax bills will reduce retirement saving incentives.
Inheritance tax receipts have already reached record levels, hitting £6.3bn between April and December 2024, £600m higher than the same period in 2023.
The Office for Budget Responsibility expects receipts to rise to £8.3bn in 2024-25, marking a 10.7 per cent increase from the previous tax year. The policy changes announced in Labour’s October Budget, including the pension wealth tax, are projected to generate an additional £2.5bn in receipts by 2029-30.
The proportion of estates subject to inheritance tax is expected to nearly double, rising from 5.2 per cent in 2023-24 to 9.5 per cent in 2029-30.
