What changes in April 2027
Until now, most unused pension pots have sat outside your estate, so no inheritance tax was due on them. That changes for deaths on or after 6 April 2027. Most unused pension funds and pension death benefits will count as part of your estate.
That has three knock-on effects:
- The pension itself can be taxed at 40% once your allowances are used up.
- A big pension can cost you the home allowance. The £175,000 residence nil-rate band shrinks by £1 for every £2 your estate is worth over £2 million. Pensions now count towards that £2 million.
- Your family may pay income tax too. If you die at 75 or over, your family pays income tax on what they draw. It’s charged on what’s left after inheritance tax, not on the whole pot.
Some things stay outside: death-in-service benefits paid from a registered pension scheme are excluded. Pensions left to a spouse, civil partner or charity are exempt.
Own a rental property? It counts towards your estate too. See whether to sell it or keep it with the sell or keep calculator on Landlord Sums.
Got a pension and a home worth over £1 million together?
Before April 2027, it’s worth a one-off conversation with a regulated financial adviser about how you draw your pension and who you name as beneficiaries.
Find a financial adviserThe allowances
| Nil-rate band (everyone) | £325,000 |
|---|---|
| Residence nil-rate band (home to children or grandchildren) | £175,000 |
| Home allowance starts tapering at | £2,000,000 |
| Rate above the allowances | 40% |
| Rate if 10%+ goes to charity | 36% |
Both bands are frozen until 5 April 2031. A widow, widower or surviving civil partner can add their late partner’s unused allowances, so a couple can pass on up to £1 million tax-free.
Worked example
Margaret is widowed and 78. She owns her £600,000 home outright and has £250,000 in savings and a £400,000 pension pot. Everything goes to her two children, who are higher-rate taxpayers. Her late husband left everything to her, so she has both his allowances too.
| Allowances (2 × £325,000 + 2 × £175,000) | £1,000,000 |
|---|---|
| Estate under today’s rules (no pension) | £850,000 |
| Inheritance tax today | £0 |
| Estate from April 2027 (with pension) | £1,250,000 |
| Taxed at 40% (£1,250,000 − £1,000,000) | £250,000 |
| Inheritance tax from April 2027 | £100,000 |
The pension’s share of that bill is £32,000 (400/1,250ths). Her children then pay 40% income tax on the remaining £368,000 as they draw it: £147,200. Of the £400,000 pension, they keep £220,800. That’s an effective tax rate of 45%.
Who pays the tax on a pension?
The executors (personal representatives) report and pay it, just as for the rest of the estate. If they expect tax to be due, they can ask the pension scheme to hold back up to 50% of the taxable benefits for up to 15 months and pay the tax straight to HMRC. Beneficiaries who receive pension money are jointly liable for the tax on it.
Questions
Will my pension be taxed twice?
Only if you die at 75 or over. Inheritance tax comes first. Your family then pays income tax on what they draw, but not on the part that went in inheritance tax. If you die before 75, pension money usually passes free of income tax.
Is death-in-service cover included?
No. Death-in-service benefits paid from a registered pension scheme stay outside your estate.
What if my pension goes to my husband, wife or civil partner?
It’s exempt, just like anything else you leave to them. The money then becomes part of their estate, so tax may be due when they die instead.
Does a defined benefit (final salary) pension count?
A pension paid to you for life stops when you die, so there’s usually nothing to tax. Lump sums or guaranteed payments paid out after your death can be included. Ask your scheme what it would pay out.
Are the allowances going up?
No. The £325,000 and £175,000 bands are frozen until 5 April 2031. The £325,000 band hasn’t changed since 2009.
What does this calculator leave out?
Business and agricultural property relief, trusts, gifts with reservation, taper relief on gifts, and assets abroad. It treats your pension as one pot going to non-exempt beneficiaries unless you tick the spouse box. It’s a guide, not tax advice.