The inheritance tax pension changes from 6 April 2027 bring most unused pension funds and lump sum death benefits inside your estate, taxed at 40% above your available thresholds. Pensions left to a spouse or civil partner stay exempt. Your executors, not the pension scheme, report and pay the tax. General information for England and Wales, not advice.
What are the inheritance tax pension changes coming in 2027?
The change was announced at the October 2024 Budget and carried into the Finance Act 2026, effective for deaths on or after 6 April 2027 (gov.uk technical note, as at August 2026, subject to change). It applies to registered pension schemes and certain overseas schemes. Until then, most defined contribution pots still pass outside the estate.
Inheritance tax applies only above your nil-rate band (£325,000) and residence nil-rate band (up to £175,000), both frozen until 5 April 2031. The rate is 40%, or 36% where 10% or more of the net estate goes to charity (how inheritance tax works).
Which pensions and death benefits are caught, and which are exempt?
| Pension or benefit | Inheritance tax position from 6 April 2027 |
|---|---|
| Unused defined contribution pot (uncrystallised or in drawdown) | Counted in the estate, potentially 40% |
| Lump sum death benefits from most schemes | Counted in the estate, potentially 40% |
| Anything passing to a spouse or civil partner | Exempt (spousal exemption) |
| Anything passing to a registered charity | Exempt |
| Death in service benefit paid because of employment | Excluded from the charge |
| Dependants' scheme pensions and joint life annuities | Excluded from the charge |
Source: gov.uk, Inheritance Tax on pensions technical note, as at August 2026, subject to change.
The spousal exemption is the key line for most couples: a pension left to a husband, wife or civil partner passes with no inheritance tax. The charge tends to bite when a pot passes to children or others.
Do beneficiaries pay both inheritance tax and income tax?
Most coverage mentions this double charge but rarely works it through. The taxes apply in sequence: inheritance tax on the pot, then income tax on what the beneficiary draws. The example takes a £100,000 unused pension above the nil-rate bands, passing to a non-exempt beneficiary after a death at 75 or over.
| Step | Basic rate (20%) | Higher rate (40%) | Additional rate (45%) |
|---|---|---|---|
| Unused pension | £100,000 | £100,000 | £100,000 |
| Less 40% inheritance tax | (£40,000) | (£40,000) | (£40,000) |
| Remaining to draw | £60,000 | £60,000 | £60,000 |
| Less income tax on withdrawal | (£12,000) | (£24,000) | (£27,000) |
| Beneficiary keeps | £48,000 | £36,000 | £33,000 |
| Effective rate lost | 52% | 64% | 67% |
Illustrative only. Assumes the pension falls above available nil-rate bands, a death at age 75 or older, and drawdown within the stated income tax band. Individual results vary. Figures as at August 2026, subject to change.
Die before 75 and the income tax layer falls away: the £60,000 balance is drawn free of income tax. Age at death changes the result sharply, so timing and beneficiary choice matter.
Who reports and pays the tax, your executors or the pension scheme?
This is where families feel the change: executors must find every pension, value it, and fund a tax bill on money they may not control.
- Value the pension at death. The unused pot is valued immediately before death and added to the rest of the estate for the inheritance tax calculation.
- Executors report it. Your personal representatives, not the scheme, report the pension and are liable for the inheritance tax on it. The government confirmed this in its 2025 consultation response, dropping an earlier plan to make schemes liable.
- Beneficiaries share the liability. Once the scheme confirms who inherits, those beneficiaries become jointly liable alongside your executors.
- Use the Direct Payment Scheme if needed. Executors or beneficiaries can instruct the scheme to pay the tax directly to HMRC, and executors can ask a scheme to hold back up to 50% of the benefit for up to 15 months after the month of death (Finance Act 2026).
- Meet the deadline. Inheritance tax is generally due by the end of the sixth month after death, with interest after that, so estate liquidity needs planning early.
Source: gov.uk, consultation outcome: liability, reporting and payment, as at August 2026, subject to change.
The liquidity risk is real: if an estate is mostly a house plus a pension, executors can face the deadline with little cash. Keeping a current record of pensions and naming capable executors helps, a point we cover in how to write a will.
How can you prepare for the 2027 pension changes?
- Check your beneficiaries and expression of wishes. A pension left to a spouse or civil partner remains exempt, so making sure your nominations reflect your intentions is a low-cost first step.
- Consider spending pension income first. Drawing on the pot in retirement, rather than preserving it to pass on, may leave less inside the estate, though it affects your own income.
- Look at lifetime gifting. The annual £3,000 exemption, £250 small gifts and the seven-year rule with taper on the tax can move value out of the estate over time (how much you can gift tax free; gov.uk, as at August 2026, subject to change).
- Think about charity, and take joined-up advice. Leaving at least 10% of the net estate to charity can cut the rate on the rest to 36%, and pension money left to charity is itself exempt. Because these taxes interact, a regulated financial adviser and your estate planner are best consulted together before any large withdrawal.
People often weigh these choices as part of their wider estate planning. For a discreet look at your position, you can book a consultation or see our fixed pricing.
Frequently asked questions
Will my pension be subject to inheritance tax from 2027?
In many cases, yes. From 6 April 2027 most unused pension funds and lump sum death benefits count as part of your estate and can be charged at 40% above your available nil-rate bands. Pensions left to a spouse or civil partner remain exempt. The charge tends to arise where a pension passes to children or other beneficiaries (gov.uk, as at August 2026, subject to change).
Does my spouse pay inheritance tax on my pension?
No. A pension passing to a surviving spouse or civil partner keeps the spousal exemption from 6 April 2027, just as the rest of your estate does. There is normally no inheritance tax at the first death where the pension goes to your partner. Tax may arise later, when the survivor's own estate passes on, depending on the bands available then.
Do I pay both inheritance tax and income tax on an inherited pension?
Sometimes. If the holder dies at 75 or older, an inherited pension can face 40% inheritance tax and then income tax at the beneficiary's marginal rate on withdrawals, a combined effective rate of roughly 64% to 67% for higher and additional-rate beneficiaries. If the holder dies before 75, the income tax layer usually does not apply, so only the inheritance tax charge remains.
Who is responsible for paying the tax, my executors or the pension scheme?
Your personal representatives, usually your executors, report and pay the inheritance tax on unused pensions from April 2027; the government dropped an earlier plan to make schemes liable. Executors or beneficiaries can instruct the scheme to pay HMRC directly through the Pensions Direct Payment Scheme, and beneficiaries become jointly liable once the scheme confirms them.