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Deferring your state pension will lose your income tax exemption
Earlier in the year, the then Chancellor, Rachel Reeves, promised that pensioners who rely solely on the state pension will not pay income tax, but this exemption will not apply to those who defer their state pension.
The state pension is expected to rise by over £500 next year, taking it above the £12,570 personal allowance for the first time. Experts believe it may reach over £13,000 if next year’s uplift matches wages growth. Deferral increases the pension by 1% every nine weeks, or 5.8% per year. Under the government’s rules, someone deferring for one year and claiming in April 2027 could face an extra tax bill of up to £560, while someone claiming immediately would pay nothing.
Analysis from consultants, LCP, shows the exemption pledge helps only 800k out of 13.2m pensioners. Those with Serps, living abroad, or receiving other taxable income will not qualify. Experts feel it is ‘odd to penalise those who defer and not those who don’t’, especially when the government wants people to work longer.
HMRC reviewing over 100,000 tax calculations due to system error
HMRC is manually reviewing 107,000 tax calculations from the 2025-26 tax year after taxpayers complained that they had been overcharged. The underlying fault has existed for years – first acknowledged in 2021 – and still hasn’t been fixed.
The error affects how tax-free allowances are allocated across different income types, including earnings, pensions, savings interest, and dividends. The issue is known as the ‘beneficial ordering’ error, one of several HMRC system faults that can lead to taxpayers paying more tax than they owe.
Optimal use of allowances varies by individual circumstances, meaning misallocation can significantly affect how much tax someone pays. If you have multiple income sources (salary, pension, savings interest, dividends), you may be affected, especially if the system failed to allocate your personal allowance in the most tax-efficient way.
New scheme for those with Loan Charge liabilities top
HMRC is writing to households with outstanding Loan Charge debts, offering a new Settlement Scheme that can cut liabilities by up to £70k. The scheme aims to reduce most customers’ bills, and around one-third may end up paying nothing at all.
It applies to UK residents who used ‘disguised remuneration’ or loan schemes – arrangements where individuals were paid through loans to avoid income tax and National Insurance. The Loan Charge covers loans received after 9 December 2010 and was introduced in 2017, treating these loans as taxable income. Around 50,000 people are affected by the Loan Charge according to the Government.
HMRC has stated that it will remove late payment interest and reduce every customer’s bill by £5k. Bills could be reduced by a maximum of £10k per year that an avoidance arrangement was used. Anyone agreeing to settle under this new scheme can spread their repayments over five years.
Family heirlooms could reduce your inheritance tax liability
Certain family heirlooms, artworks, manuscripts, collections, land, or historic estates can significantly reduce – or even eliminate – inheritance tax (IHT) if they qualify as items of national importance and are kept under specific HMRC schemes.
These objects of outstanding national, scientific, historical, or artistic importance are known as ‘pre-eminent items’. These items can reduce inheritance tax because the UK has long-standing exemptions for works of art, originally introduced to prevent important pieces being sold abroad.
Two key schemes now exist: Conditional Exemption and Acceptance in Lieu. For the former, if an item is accepted as being of national importance, its value can be deducted from the estate, meaning no IHT is due on it. However, the owner must meet strict conditions: keep the item safe, keep it in the UK, publicise it, and make it accessible to the public (e.g., through viewings or loans to museums).
The scheme is designed to encourage families to retain heirlooms while ensuring public benefit. Many people assume they must sell valuable items to reduce their estate size but keeping culturally significant objects can be financially advantageous under these schemes.
Acceptance in Lieu is different in that you relinquish ownership of pre-eminent items to settle all or part of your IHT bill (you receive a tax credit).
October Questions and Answers
Q: I’m in a marriage where one of us is not earning and one still is. If we move money between our personal savings accounts, who is treated as earning the interest income to work out the tax?
A: As the accounts are not joint, HMRC treats the movement of money between spouses’ personal savings accounts as an outright, tax‑free gift. It also states that when money is moved between individual savings accounts, the person whose name is on the account is responsible for any tax due on the interest earned.
It is worth noting that interest earnt in a joint account is split 50/50 between the people named on the account when calculating the tax due.
Basic rate taxpayers can earn up to £1,000 interest a year, tax-free. For higher rate taxpayers it is £500 and additional rate taxpayers get no allowance. If your income is below the personal allowance threshold of £12,570, you can earn an extra £5,000 of interest tax-free.
Q: I’ve had many jobs in my career which means I have multiple, but small, pensions. I’ve heard it might be tax efficient for me to use the ‘small pension pots’ rule. Can you advise?
A: The small pots rule allows you to cash in defined contribution pension pots worth £10k or less as a single lump sum (up to a maximum of three). The tax treatment is the same as other withdrawal methods in that 25% is tax free and 75% is taxed at your marginal rate.
However, it may be more tax efficient for you to cash in smaller pension pots and then make larger contributions to your main pension before retirement. You lose 20% to tax on the withdrawals but gain tax relief when you contribute back (as well as eliminating ongoing charges on multiple pots).
The key benefit is that this rule does not trigger the money purchase annual allowance (MPAA), so you can still contribute up to £60k a year afterwards. This is invaluable if you are still working and contributing to a pension but want to consolidate other pots.
If you’d like to find out if this could benefit you, please get in touch with us.
Q: I run my own limited company and need to withdraw a £40k lump sum (on top of my annual ‘salary’ of £30k). What’s the best way to do this, to incur the least amount of tax?
A: There are four main options to make this withdrawal, each having different implications on not only your tax position, but also your business’ cash flow.
Option 1 – take the full £40k as a dividend in this tax year. Part may fall into the basic-rate dividend band and part into the higher-rate dividend band depending on total taxable income. Dividend tax rates for 2026/27 are 10.75% (basic rate) and 35.75% (higher rate).
Option 2 – take the £40k as a dividend split evenly over two tax years (tax payable on first dividend by 31 Jan 2028, second by 31 Jan 2029 both at the basic rate of 10.75%)
Option 3 – take the full £40k as a director’s loan (s455 tax payable at 35.75% by the company nine months and one day after your financial year-end; benefit-in-kind charge payable by you and Class 1 National insurance deducted and paid)
Option 4 – take a dividend and director’s loan combination (tax rates and when payable depends on the split, but this tends to be the cheapest option)
It is important to state that the cheapest tax option may not be the best decision for your company; it should align with your personal and business goals.
If you’d like to run through the numbers of each option, please get in touch with us.
October Key Dates
1st
– Corporation Tax payments are due for companies with a year-end of 31st December.
19th
– For employers operating PAYE, this is the deadline to send an Employer Payment Summary (EPS) to claim any reduction on what you’ll owe HMRC.
– It is also the deadline for employers operating PAYE to pay HMRC by post, for September.
22nd
– Deadline for employers operating PAYE to pay HMRC electronically, for September.
31st
– Corporation Tax Returns (CT600 form) are due for companies with a year-end of 31st October.
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