Taxing Inherited Pension Pots

As the Labour government marks its first year in office, the dust is settling—and the public’s reaction to new tax measures is starting to come through loud and clear.

And one thing is certain: taxing inherited pension pots has struck a national nerve.

According to a new poll by AJ Bell, the proposal to charge Inheritance Tax (IHT) on unused pensions is the single most disliked tax policy introduced so far under the new Chancellor. Only 21% of Brits support the move, while 44% are opposed outright.

What Is Labour Actually Proposing?

Under the current rules, many pension pots are passed on outside of IHT—especially if the individual dies before age 75. Labour’s new policy, due to take effect from April 2027, would see unused defined contribution pensions taxed as part of the estate for IHT purposes. That means loved ones could be taxed twice: once through IHT, and again via income tax if they withdraw the funds.

The Treasury estimates this move will bring in £640 million in 2027–28, more than doubling to £1.34 billion the following year, and hitting £1.46 billion by 2029–30.

But at what political cost?

What Do the People Think?

Let’s just say... not much.

While some tax increases have received mixed or even positive feedback (more on that below), the pension IHT change is by far the most unwelcome among voters, cutting across demographics. It seems pensions are a financial no-go zone in the public’s eyes—perhaps seen as a life-long savings reward, not a tax target.

Tom Selby, Director of Public Policy at AJ Bell, didn’t mince words:

“IHT is often described as the most hated tax… widening it to catch pensions only fuels that sentiment.”

What Else Has Changed—and How Did That Go Down?

Here’s a quick roundup of the other tax changes under Labour and how the public feels about them:

👍 Most Popular

Stamp Duty on Second Homes and Buy-to-Lets

Widely supported, with many welcoming the effort to cool an overheated property market and help first-time buyers.

VAT on Private School Fees

Supported by more than half of respondents, though parents and independent schools have fiercely opposed it. One recent High Court challenge was denied, cementing the policy for now.

Abolition of Non-Dom Status

Labour replaced the "non-dom" regime with a residence-based system, meaning those who’ve lived in the UK for 15+ years must now pay UK tax on worldwide income. 44% approved of this move.

👎 Less Popular

Employer National Insurance Increases

41% disapproved. Business owners especially have felt the squeeze, though surprisingly, 24% supported it.

Capital Gains Tax (CGT) Speculation

While no official change has been made (yet), rumours swirl that CGT may be next on the chopping block. Investors are watching the upcoming Budget closely.

Why Are Pensions Such a Red Line?

Unlike private school fees or second-home levies, pensions are seen as sacrosanct—a reward for decades of work and discipline. Many people feel that taxing what's left behind from a pension pot is a punishment for careful saving.

As Selby noted, it risks double-taxing funds that were already set aside with long-term security in mind.

Moreover, pensions often make up the largest financial asset someone has at the end of life—especially for those who’ve never owned a property or built other investments.

What Happens Next?

There’s still time for a U-turn—or at least some softening of the rules. With implementation not due until 2027, pressure from voters, pension providers, and even backbench MPs could force the Chancellor to revisit the proposal.

At The Tax Faculty, we’ll be keeping a close eye on any changes—so our clients don’t get caught off guard.

👋 Need Tax Advice in Uncertain Times?

If you’re unsure how these changes could affect your estate, pension planning, or investments, The Tax Faculty is here to help. Our expert advisers stay ahead of every policy so you don’t have to.

📞 Book a free consultation today and let us help you plan with confidence—whatever the next Budget brings.

Capital Gains Tax Expertise: The Tax Faculty LLP Managing Partner Charles Tateson Named UK Capital Gains Tax Advisor of the Year 2023

The Finance Monthly Taxation Awards recognises the achievements of tax professionals from around the globe.

Winning such an award is no small feat. It is a reflection of hard work, extensive knowledge, and an ability to navigate the intricacies of the UK tax system.

Read more about Charles and the award here.

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