Average earners dragged into IHT net – how can you reduce your taxes?
New rules to include pensions in estates for Inheritance Tax purposes could see average earners dragged into the IHT net.
How can you protect your assets?
Inheritance tax receipts rose over £8bn in the 2025 to 2025 financial year, an increase of £0.8bn from the year before.
That was due to a combination of rising asset values as well as frozen thresholds, which have been the same since 2022.
That number is only set to get higher, even for those earning the average national wage. Data from interactive investor shows plans to include pensions in IHT calculations coupled with frozen nil-rate bands means anyone’s estate could fall into the IHT net.
A 45-year old earning the national average wage of £35,000 could have a projected IHT liability of £194,529 at age 68. That rises to £218,992 and £267,914 respectively for those earning £50,000 and £80,000.
If you’d like to run your own “what-if” scenarios or see how different pension values feed into your future IHT bill, consider logging into interactive investor’s platform.
Their pension overview tools let you aggregate multiple funds, model growth rates and instantly view projected estate values when IHT rules change in April 2027.
Will my estate be liable for IHT?
Chancellor Rachel Reeves announced plans to include unused pension savings as well as some pension death benefits in the value of estates from April 2027.
As a result, nearly 153,000 estates could face new or added IHT liability by 2030. That includes 31,200 extra estates that will have to pay IHT.
“The double whammy of plans to include pensions in IHT calculations, alongside the ongoing freeze in nil-rate bands, means that IHT is increasingly becoming a tax for all, not just the wealthy as it was originally portrayed,” said Myron Jobson, senior personal finance analyst at interactive investor. “The stark reality is that the IHT net is expanding, increasingly ensnaring people with modest assets.”
How can I protect my estate from IHT?
First things first, getting to grips with changes to IHT is key for those looking to protect as much of their inheritance as possible.
Get to grips with your allowances. Everyone gets a tax free allowance of £325,000, and 40 per cent is charged on any amount over that. But if you use the IHT spouse exemption, you can essentially double that.
If you leave your estate to your surviving spouse, they can inherit your unused nil-rate band, allowing them to leave an estate of up to £650,000 before it becomes liable for IHT.
It’s also important to make use of gifting allowances. Currently you’re able to make gifts of up to £3,000 without paying tax of them as well as as many gifts of £250 as you want.
“For those with larger potential liabilities the ‘gifting out of surplus income’ rules will come in handy,” says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. “However, they will need to make careful records to demonstrate the gifts are regular and that making them does not disrupt their standard of living.”
“Using the annual gifting exemption is one of the simplest ways to reduce inheritance tax. Even if you die within seven years, there will be no tax to pay. You can also carry the allowance forward by one year, so you could gift £6,000 this tax year if you didn’t use the exemption last year,” adds Jobson. Additionally, couples can double their allowance.
If you’d like step-by-step help to ensure your gifts are structured correctly (and you don’t accidentally trigger a taxable “Deprivation of Assets”), you can schedule a fixed-fee session with Tax Scouts. Their accountants will confirm you’ve met all the record-keeping requirements before you make any large gifts.
You can also gift £10,000 from surplus income. These are excluded from your estate for IHT purposes, even if you die within seven years – but it’s a very underused rule. Only 430 families claimed the exemption in the 2022-23 tax year,” adds Craig Rickman, personal finance expert at interactive investor.
If you earn £30,000 after tax and spend £20,000, you could give away £10,000 and not pay IHT. Giving this gift regularly across a number of years could significantly reduce your IHT bill – just make sure you’re not over gifting, and that you’re keeping note of the gifts as otherwise your family could face a tax bill once you die.