Autumn Budget 2025 Private, Company and State Pensions

The Autumn Budget 2025 covered multiple areas in connection with pensions, pension death benefits, surpluses on defined benefits, expats, and state pensions.

We already know from Autumn Budget 2024 that unused pension funds will be included in our estates on death and therefore potentially subject to inheritance tax (IHT) from April 2027 and the fact that pension scheme trustees can pay the pension fund’s share of any IHT liability direct to HMRC and this has now been clarified further.

Pensions on Death and Personal Representatives

• Withold 50% for 15 months:  The Budget confirmed that the personal representatives (and executors if there is a Will) will be able give instructions to pension scheme trustees to withhold up to 50% of the pension fund value due to be paid to beneficiaries direct (most pension schemes are already trusts so they do not have to wait for the Will to be ‘proved’ to then distribute pension funds on death.  This is designed to ensure that there are enough funds withheld to cover any share of the IHT liability.
• No Liability After HMRC Clearance: The Budget also confirmed that if the estate accounts have been finalised, any IHT bill paid and HMRC has issued ‘clearance’ to allow representatives to apply for probate/distribute the net estate and close off the estate, if there is subsequently another pension fund traced after the estate has been settled meaning more IHT is due, the government has allowed that the personal representatives/executors will not be liable for the IHT (as they are when administering the estate).  The are discharged from this liability and HMRC will collect any additional IHT due from the pension scheme trustees.

Defined Benefit Scheme Surplus

The Budget confirmed that from April 2027, trustees of defined benefit schemes in surplus (excess assets over liabilities) will be pay the surplus funds as pension directly to pension scheme members that are already at or over the Normal Pension Age of that scheme.

Collective Money Purchase Schemes

The government will legislate to allow unconnected workplace money purchase schemes to combine schemes and apply to HMRC for approval of a new ‘collective’ registered pension scheme.  For example, The Worshipful Company of Plumbers, a historic guild that supports the plumbing industry could work with members to set up a Collective Money Purchase Pension Scheme for Plumbers.  This would create economies of scale if a pension scheme were created overnight with 1,000 plumber members and £millions in the fund for better terms, funds and at retirement choices rather than each plumbing firm having its own company pension scheme and paying marginally higher charges.

British Coal Superannuation Scheme

The government’s Investment Reserve Fund in the British Coal Staff Superannuation Scheme will be transferred to the scheme Trustees to be paid out as an additional pension to members of the scheme.

State Pensions Increase

The Budget confirmed that the triple lock remains for now and State Pensions will increase by wages inflation of 4.8% in April 2026.

State Pensions Simple Assessment

Given the Personal Tax Allowance PTA (£12,570) is to remain frozen now until end of tax 2030/31, it is already happening and will be long be all state pensioners have old style basic state pension and new state pensions payable above the PTA means income tax is due above that level, the government will, from April 2027, make changes as follows:

• Currently, HMRC issues a Simple Assessment Tax Return for those that need to pay Income Tax that is not automatically taken out of your income.  For example, if you have the wrong tax code or owe tax on bank and/or building society interest where tax is due but was not deducted from interest payments as they are paid gross.
• From April 2027, where pensioners sole sources of income are from state pensions and they exceed the PTA, where tax would be due, a simplification of Simple Assessment will mean no income taxes will need to be refunded to HMRC.
• If you have other sources of income such as interest and other pensions, the tax due under any Simple Assessment, including excess State Pensions, will still be payable.

State Pensions and Voluntary National Insurance Contributions for Non-UK Residents

Current Voluntary National Insurance Contributions (VNICs) rules allow those with a limited connection to the UK to still be able to build up UK state pensions cheaply via Class 2 VNIC.

If you have a shortfall in your UK State Pension NIC credits, you currently can pay either:

• £3.50 a week (£182 pa) for Class 2 VNIC or
• £17.75 a week (£923 pa) for Class 3 VNIC.
• A full year’s NIC buys you another full year credit towards your UK State Pension.
• Some people abroad are therefore paying just £182 per year (provided they are still working overseas) to pay and gain access to a cheap UK state pension provided they have worked and paid NIC in the UK (if you did not work/pay NIC when in UK it is the £17.75 per week rate)

This is unfair when many UK based employees, employers and self employed are paying much more than £3.50 per week to build up UK state pensions.

• The Government will remove access for people abroad from paying the lower Class 2 rate unless they have had 10 years UK residency or minimum contributions already paid for 10 years.

Salary Sacrifice Cap

To save on employers and employees NIC, many employees sacrifice significant amounts of salary with their employer then making the equivalent employer pension contributions (including the saved NI).  The government believes this benefits the wealthy disproportionately as the lower paid cannot afford to sacrifice salary for pensions meaning the wealthy pay a lower proportion of ‘gross pay’ in NIC.

• From April 2029, salary sacrifice will be capped at £2,000 pa, and any sacrifice in excess of this will be subject to NICs and employers will not be able to offset that proportion of pension contribution against business taxes as a trading expense.

Pension Protection Fund (PPF) Payments

When a defined benefit pension scheme employer becomes insolvent, defined benefit pension scheme liabilities are passed to the PPF (in the same way that defined contribution/investment linked pensions, bank deposits etc are protected by the Financial Services Compensation Scheme FSCS). 

• Currently, the law only requires pensions built up after the Pensions Act 1997 to have inflation protection i.e., pension payments increase by the lower of CPI and 2.5% pa.  Some of the better schemes do have inflation protection for benefits build up before 1997 but many do not.
• Currently, if a DC scheme is transferred to the PPF, whether it originally offered pre 1997 and post 1997 inflation protection, the PPF compensation scheme will only honour post 1997 benefits to make inflation protected payments.
• From January 2027, the PPF will honour and pay inflation protected pension payments for pre 1997 benefits provided the original scheme offered pre 1997 accrued benefits inflation protection.

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