Last updated: 14 October 2026
What are the pension and Inheritance Tax changes, and how do they work?
From 6 April 2027, most unused pension funds and pension death benefits will be included in a person’s estate for Inheritance Tax (IHT). Until then, most defined contribution pensions passed on outside the estate. The change is now law in the Finance Act 2026. Death in service benefits, dependants’ scheme pensions and joint-life annuities are excluded. Personal representatives (executors) must report and pay any IHT due on pensions, and can ask schemes to hold back 50% of the benefits for up to 15 months to cover it.
What’s in and out from April 2027
| Pension benefit | In the estate for IHT? |
| Unused defined contribution fund paid to children or others | Yes |
| Pension left to a spouse or civil partner | Yes, but covered by the spouse exemption |
| Death in service lump sum from an employer scheme | No |
| Dependant’s scheme pension, e.g. a spouse’s DB pension | No |
| Joint-life annuity continuing to a spouse | No |
| Lump sum to a charity | No |
Income tax on top for some beneficiaries
If the member dies at 75 or over, beneficiaries also pay income tax on what they draw from an inherited pension. That’s on top of any IHT already paid on the fund, so the combined tax can be high. If the member dies before 75, inherited funds are usually free of income tax, up to allowance limits.
Example
Malcolm dies in 2027/28 aged 78. His estate includes a £600,000 home left to his son, £100,000 of savings and a £400,000 pension fund. His late wife left everything to him, so he has two nil-rate bands and two residence nil-rate bands, totalling £1 million. His estate of £1.1 million gives £100,000 chargeable, and £40,000 of IHT. Part of it relates to the pension. His son pays income tax at his own rate on anything he withdraws from the pension.
Reporting and paying
Pension schemes must give executors details of each pension’s value. Executors include these in the IHT account. Where IHT is due, they can tell the scheme to hold back half of the taxable benefits for up to 15 months, then pay the tax directly to HMRC before releasing the rest. Funds under £1,000 and continuing annuities aren’t held back.
Salary sacrifice changes
Separately, from 6 April 2029, only the first £2,000 a year of pension contributions made through salary sacrifice will be free of National Insurance. Contributions above that will be treated as earnings for NIC. Income tax relief on the contributions is unaffected.
What to review now
- Your pension nomination forms, so funds go where you intend
- Whether to draw more income in retirement and make gifts from surplus income
- Life insurance in trust to cover the extra IHT
- Your will, especially if your estate will go over £2 million, where the residence nil-rate band tapers
Frequently asked questions
Does the change apply if death is before April 2027?
No, the current rules apply.
Who pays the IHT on a pension?
The personal representatives, with beneficiaries also liable.
Is the lump sum allowance changing?
No, it stays at £268,275.
Should I stop paying into my pension?
Not necessarily; income tax relief still makes it efficient.
Related: the IHT changes so far, IHT on life insurance payouts and inherited pensions and IHT.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with pensions and Inheritance Tax. See our small business accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
