Inheritance tax in the UK is not just targeting the wealthy, explains industry experts, but also those Britons on average and modest wages. Even those British families with average salaries can find themselves paying hundreds of thousands of pounds in inheritance tax.
It comes as plans to include pensions in IHT calculations, alongside the ongoing freeze in nil-rate bands, means even the estates of low and average earners could face IHT charges.
For a 45-year-old earning the national average of £35,000, the projected IHT bill at age 68 is £194,529, according to interactive investor’s analysis.
Inheritance Tax (IHT) in the UK is a levy on the estate of someone who has passed away, covering property, money, and possessions.
While traditionally viewed as a concern for the wealthy, more average earners are now facing significant IHT bills due to rising asset values and frozen tax thresholds.
Understanding Inheritance Tax
As of the 2025/26 tax year, each individual has a tax-free allowance, known as the nil-rate band, of £325,000. Additionally, there’s a residence nil-rate band of £175,000 if you pass your home to direct descendants, such as children or grandchildren.
Combined, this allows individuals to pass on up to £500,000 tax-free, or £1 million for married couples or civil partners. Any amount above these thresholds is taxed at 40%.
These thresholds have been frozen until at least 2030, meaning that as property and asset values increase, more estates are becoming liable for IHT. In fact, IHT receipts have hit a record high of £8.2 billion in the 2024-25 tax year, more than double the £3.8 billion collected a decade ago.
The Impact on Average Earners
Recent analysis indicates that even those on average incomes could face substantial IHT bills. For example, a 45-year-old earning £35,000 annually could leave an IHT bill of approximately £194,529 by the time they reach 68. This projection considers factors like home ownership, pension savings, and the inclusion of pensions in IHT calculations from April 2027.
Myron Jobson, a senior personal finance analyst at interactive investor, notes, “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.”
Planning Ahead
To mitigate potential IHT liabilities, it’s advisable to engage in estate planning, explains inheritance finance provider, Provira.
This can include making a will, considering lifetime gifts, and exploring trusts or other financial instruments.
Given the complexities and potential changes in legislation, consulting with a financial advisor or estate planner can provide tailored strategies to protect your estate and ensure your wishes are fulfilled.
Understanding and planning for IHT is becoming increasingly important for a broader segment of the population, not just the affluent.
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