Key takeaways
- From 6 April 2027 most unused pension funds count as part of the estate, so the part above the nil rate band is charged inheritance tax at 40%.
- A child inheriting after a death at 75 or over also pays income tax on what is left, taking the combined charge to 52% at the basic rate and 67% at the additional rate.
- A surviving spouse or civil partner is exempt, so a £300,000 pot reaches them with no inheritance tax, and no income tax either if the death was before 75.
- Pot size changes the bill, not the rate. Once the £325,000 nil rate band is used up, £100,000 and £750,000 are charged identically.
- The government estimates 10,500 estates will owe inheritance tax that would not have owed it before, and 38,500 will pay more, in 2027 to 2028.
Who inherits matters more than how big the pot is
If you hold a defined contribution pension and you have children, the question is what the 2027 change costs them. Here is the answer before the detail. Pension inheritance tax from 2027 is two taxes in sequence, and only the first of them is new.
From 6 April 2027 the unused funds in your pension count towards your estate. The part above your nil rate band is charged inheritance tax at 40%. Die at 75 or over and whoever inherits pays income tax on what is left as well. Stack the two and a child at the basic rate ends up 52% down on the pot. At the higher rate it is 64%, and at the additional rate 67%.
A surviving spouse or civil partner sits outside all of that. The inheritance tax exemption for death benefits passing to them is kept, so the pot reaches them intact. If you died before 75 they pay no income tax on it either, which makes the combined take 0%.
What barely moves the rate is the size of the pot. Once your nil rate band is spoken for, £100,000 and £750,000 are charged at the same percentage. Pot size changes the bill, not the rate, so the tables below show the cash and the rate side by side.
Pension inheritance tax in 2027 lands twice on a pot left to a child
Three assumptions hold the table together, and they are the ones that matter. First, the rest of the estate has already used the available nil rate band, so the pension is taxed from its first pound. Second, the inheritance tax is settled out of the pension. HMRC’s technical note is explicit that where that route is used, “any Income Tax will be charged on the pension benefits net of Inheritance Tax”. Third, the beneficiary draws the whole pot in one tax year at a single rate. The last of those is the one the final sections take apart.
| Pot | Inheritance tax at 40% | Left in the pension | Child nets, death before 75 | Child nets, death at 75+, basic rate | Child nets, death at 75+, higher rate | Child nets, death at 75+, additional rate |
|---|---|---|---|---|---|---|
| £100,000 | £40,000 | £60,000 | £60,000 | £48,000 | £36,000 | £33,000 |
| £300,000 | £120,000 | £180,000 | £180,000 | £144,000 | £108,000 | £99,000 |
| £750,000 | £300,000 | £450,000 | £450,000 | £360,000 | £270,000 | £247,500 |
| Combined take | 40% | 40% | 52% | 64% | 67% |
Read the bottom row across and the point of the table appears. The cash changes by a factor of seven and a half between the first and last row. The percentage does not change at all.
The stacked rate does not move with the pot, and that catches people out
The reason is that both charges are flat rates applied in sequence. Inheritance tax takes 40%, leaving 60% of the pot. Income tax then takes the beneficiary’s marginal rate out of that 60%. At the basic rate of 20% that is another 12 pence in the pound, so 52% in total. At 40% it is another 24 pence, so 64%. At the additional rate of 45% it is 27 pence, so 67%.
The chart above plots the combined take across the seven cases that cover most households: a spouse or a child, and a death before or after 75. The range runs from nothing to 67%, and almost none of the spread is explained by how much is in the pension.
Two of those bars deserve a flag. A spouse who inherits after a death at 75 or over pays no inheritance tax, but the pension income is taxable at their own marginal rate, so the combined take is 20% or 40% depending on where that income lands. The bar for a child after a death before 75 is 40%, and it is pure inheritance tax.
A spouse pays no pension inheritance tax, and that is the single biggest fork
The 2027 pension inheritance tax charge stops dead at an exempt beneficiary. The policy paper confirms that “the existing Inheritance Tax principles providing exemption for death benefits passing to a surviving spouse or civil partner, and registered charities will be maintained”. That exemption is not a relief with a cap. It removes the 40% charge entirely on whatever passes that way.
The administrative consequence is unusual. Pension scheme administrators have to tell the personal representatives the value of the pension including anything going to exempt beneficiaries, and the personal representatives then claim the exemption in the account they file with HMRC. The exemptions are not netted off before the value is reported.
It is worth being precise about what the exemption does and does not reach. It covers the inheritance tax. It does not touch the income tax, so a widow or widower inheriting after a death at 75 or over still pays income tax at their marginal rate on what they draw. Nothing here is changed by how the deceased nominated the pension, because the charge now applies whether or not the scheme has discretion over who receives the money.
Age 75 is the line that turns one tax into two
The age 75 rule predates this change and is unaffected by it. HMRC’s technical note puts it plainly: “If a member dies below age 75, pension income from survivors’ annuities and dependants’ drawdown funds are usually tax-free … If the member was over age 75, all death benefits are taxable.” Pension death benefits after age 75 already carried the beneficiary’s income tax before this reform. What is new from 2027 is that the inheritance tax sits in front of it.
Two side conditions bite on the tax-free side of the line. A lump sum paid more than 2 years after the provider is told of the death becomes taxable even where the death was before 75. And the tax-free treatment of a lump sum only runs up to the deceased’s lump sum and death benefit allowance, £1,073,100 unless they held a protected higher figure, above which the excess is taxed at the recipient’s marginal rate.
How often does the 75 line actually bind? The government’s own impact note says 79% of inheritance tax is paid by the estates of individuals aged 75 or over. So the stacked case is not the exception. It is the ordinary one.
What the £325,000 nil rate band does to the three pot sizes
Now relax the first assumption. Take someone with no other assets, so the pension is the whole estate, and the full £325,000 nil rate band is available against it. That band has sat at £325,000 since 2009 and is set at that figure through to 5 April 2031.
| Pot as the whole estate | Chargeable above £325,000 | Inheritance tax | Effective inheritance tax rate |
|---|---|---|---|
| £100,000 | Nil | Nil | Nil |
| £300,000 | Nil | Nil | Nil |
| £750,000 | £425,000 | £170,000 | 22.7% |
This is where pot size does its work, and it works through the band rather than the rate. The £100,000 and £300,000 pots fall under the threshold and pay nothing. The £750,000 pot pays £170,000, an effective 22.7% rather than the headline 40%, because the band shelters the first £325,000. On the £580,000 left, a higher rate child who empties it in one year pays income tax at 40%, which lifts the total take to 53.6%.
Real estates sit between the two tables. Pension inheritance tax in 2027 is charged on the estate as a whole, not on the pension in isolation. The nil rate band is one band for the whole estate, and HMRC apportions the tax across the elements that make it up, so a house and a pension compete for the same £325,000. Where a home passes to children or grandchildren the threshold can rise to £500,000, and the residence element tapers away above an estate value of £2 million. We covered how those bands interact in our guide to the inheritance tax threshold uk rules. HMRC says it will build an online tool to work out how much of the band attaches to the pension, which is a fair signal of how awkward that apportionment is. Priced on the 2026 to 2027 inheritance tax threshold, a £400,000 pot added to a £1.8 million estate costs £200,000 rather than £160,000, because the residence taper moves too.
Who pays it, and out of which pocket
This is the part of the reform that changed late, and it matters more than the rate. The policy paper is clear: “Personal Representatives will be liable for reporting and paying any Inheritance Tax due on unused pension funds and pension death benefits.” Not the pension scheme. The executor.
That creates an obvious mismatch. The executor owes the tax, and the money is inside a pension the beneficiary controls. Three mechanisms close the gap. Once the pension is vested in a beneficiary, they become “jointly and severally liable, with the personal representatives” for the tax on it. Before that, an executor can serve a withholding notice requiring the scheme to hold back up to 50% of a beneficiary’s entitlement. And either of them can serve a payment notice telling the scheme to pay HMRC directly, provided the liability is at least £1,000.
The clock is the same as for any other estate. Tax on the pension is due “at the end of the sixth month after the date of death”, and late payment interest runs after that. HMRC’s own worked example gives a feel for the arithmetic: an estate with a total liability of £275,000 of which £27,500 is attributable to the pension, settled through the pensions direct payment scheme with £100 of interest on top.
So the answer to who pays depends on which pocket you mean. The executor is the one HMRC pursues. The beneficiary is usually the one out of pocket, because the inheritance tax on pension pots generally comes out of the pot.
The 67% assumes the beneficiary empties the pot in one year
Here is the strongest objection to the headline figure, and it is a good one. A marginal rate is not a property of a person. It is a property of a person in a tax year, and an inherited pension can be drawn across many of them.
Take the £60,000 left after inheritance tax on a £100,000 pot. Drawn in one go by a child who already earns more than £50,270, and whose total stays under £125,140, it is taxed at 40% throughout, and the combined take is the 64% in the table. Left in a beneficiary drawdown account and taken as £12,000 a year by someone with no other income, each slice falls inside the £12,570 Personal Allowance and the income tax is nil. The combined take then collapses back to the 40% inheritance tax alone.
So 52%, 64% and 67% are a calculation, not a forecast. They are the arithmetic of a single-year withdrawal at a stated rate, which is the worst case for the income tax layer and the easiest one to compare across pot sizes. The mechanics of spreading income across bands are the same ones we set out in filling the basic rate band, and they apply to a beneficiary exactly as they apply to the original member. The limits are real too: a beneficiary with a full-time salary has little room, and the Personal Allowance itself tapers to nothing by £125,140 of income.
What is excluded, and what is not settled
Not every pension death benefit is caught. Death in service benefits from a registered pension scheme are outside the charge, as are dependants’ scheme pensions from a defined benefit or collective money purchase arrangement. A dependants’ scheme pension is “always taxed at the recipient’s marginal rate but … an excluded benefit for Inheritance Tax purposes”, which is the mirror image of the stacked case above. Those exclusions are why this piece is about defined contribution pots rather than about pensions in general.
The limitations of the figures above are worth stating plainly, because three of them are structural. The income tax rates used here are the main rates for 2026-27, set by the Finance Act 2026 at 20%, 40% and 45%. Income tax is an annual charge, and the main rates for 2027-28 are not yet law at the time of writing, so the income tax layer above is current law applied forward rather than legislated 2027-28 law. Scottish taxpayers are a separate case again, because Scottish Income Tax “applies to your wages, pension and most other taxable income” at rates the Scottish Parliament sets.
The population numbers are estimates, not counts, and HMRC says so: they are static, exclude behavioural change, and “should be viewed as a maximum”. On that basis 10,500 estates become newly liable and 38,500 pay more in 2027 to 2028, which is 49,000 estates, with the average liability up by around £34,000. The certified yield is £710 million in 2027 to 2028, rising to £1,665 million by 2030 to 2031. And the detailed guidance is not out: HMRC has said it will publish templates and tools “for April 2027”, so the administration described above is legislated but not yet documented in practice.
What would change the conclusion
A change in the main income tax rates for 2027-28 moves the second layer directly. The stacked rate is 40% plus 60% of whatever the beneficiary’s marginal rate turns out to be, so a one point move in that rate moves the combined take by 0.6 of a point. Nothing in the inheritance tax layer has to change for the 67% to become a different number.
A change in the nil rate band moves the first layer, and it moves it most for the smaller pots. In the whole-estate case above, £325,000 is the difference between a £300,000 pot paying nothing and a £750,000 pot paying £170,000. The band is fixed through 2031, so for the next few years the thing that pushes a pension over it is the rest of the estate rising, not the band falling.
The assumption with the most slack in it is the single-year withdrawal. If beneficiaries routinely hold inherited pots in drawdown and take them across several tax years, the realised stacked rates land well below 52%, 64% and 67%, and HMRC’s own warning that its estimates ignore behavioural change points the same way. The figure to watch is not the headline rate. It is how much of an inherited pot gets drawn in the first tax year after probate, and that is a number nobody has published yet. Budget 2026 added technical plumbing here rather than a new rate, and the other pension changes for 2027 include a new Pension Tax Allowance and a two year rule that ended on Budget day.