A low earner in their mid-forties could be hit with a six-figure inheritance tax (IHT) bill by the time they retire, thanks to the double whammy of frozen tax thresholds and new rules that will drag pensions into the scope of IHT.
Someone earning just £20,000 a year today could face an IHT bill of £170,069 by age 68, new figures have shown.
This looming tax shock comes from two forces working together. First, the Government has frozen the main IHT allowance, known as the nil-rate band, at £325,000 since 2009. Second, from April 2027, pensions that haven’t been used before death will count towards your estate for tax purposes.
These changes mean inheritance tax is no longer something just the rich have to worry about. It’s starting to hit average working families who have simply saved into a pension and bought a home.
Myron Jobson, Senior Personal Finance Analyst, interactive investor, said: “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.
“The stark reality is that the IHT net is expanding, increasingly ensnaring people with modest assets.”
Rachel Reeves’ ‘double whammy tax grab’ to hit low earners with £170,000 inheritance bill
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Interactive investor ran the numbers for people aged 45, with £80,000 in their pension and a home worth £268,319, the UK average house price according to Land Registry data.
Assuming modest wage increases, two per cent annual property price growth, and pension contributions of eight per cent a year, by the time these people reach 68 they’re projected to have estates worth between £750,000 and £995,000, depending on their salary. That puts a big chunk of their estate over the tax-free threshold.
Here’s what they could be charged in IHT if they die at retirement age:
- Salary of £20,000 → IHT bill: £170,069
- Salary of £35,000 → IHT bill: £194,529
- Salary of £50,000 → IHT bill: £218,992
- Salary of £80,000 → IHT bill: £267,914
A Freedom of Information request to the Office for Budget Responsibility found that 31,200 extra estates are expected to become liable for inheritance tax by the end of the 2029/30 tax year, with 121,500 facing bigger bills than they would under current rules.
Inheritance tax can be reduced by giving gifts – but rules do apply GETTY
By 2030, nearly 1 in 10 estates is expected to face IHT up from just over five per cent today.
Jobson said: “The evolving IHT regime continues to be a major revenue stream for the government, with IHT receipts reaching record highs between April 2024 and March 2025, and likely to keep rising.
“Understanding the key changes to the IHT regime is vital for anyone looking to pass on wealth efficiently. A recent interactive investor survey* found that more than half (54 per cent) of UK adults plan to adjust their retirement or estate planning in response to the IHT changes on pensions.
He explained that Britons need a plan for the future to avoid running out of money.
Experts say it’s more important than ever to plan ahead if you want to pass on your wealth efficiently
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Experts say it’s more important than ever to plan ahead if you want to pass on your wealth efficiently. That could mean:
- Gifting smaller amounts regularly rather than large one-off sums
- Considering trusts or insurance to cover IHT liabilities
- Making sure your will and pension beneficiaries are up to date
But Jobson also warned: “It’s crucial not to overlook your own financial needs in later life – you don’t want to find yourself financially stretched in retirement.”
With the rules changing and tax thresholds staying frozen, families who once thought IHT was not their problem may need to think again.