Inheritance tax on pensions from April 2027

How it works

Until 5 April 2027, unused pensions usually pass outside your estate, free of inheritance tax. For deaths from 6 April 2027 they count as part of the estate. The calculator works out the same estate both ways, with the full planner’s inheritance tax rules, and shows the tax and what your heirs receive before and after.

For a married couple or civil partners, everything left to each other is free of inheritance tax, so the tax falls on the second death — with both people’s allowances. That’s the estate it works out: everything you both own, left by the second of you to die.

The UK rules it uses

• The nil-rate band: £325,000 each, frozen until April 2031. A husband, wife or civil partner’s unused band passes to the survivor.
• The residence nil-rate band: £175,000 each when your home goes to children or grandchildren, up to the home’s value. It shrinks by £1 for every £2 the estate is over £2 million — and from April 2027 pensions count towards that £2 million.
• Tax at 40% above the allowances, or 36% if at least 10% of the estate (after the nil-rate band) goes to charity.
• Gifts in the last seven years beyond the exemptions use up the nil-rate band first; the calculator takes them as recent, without taper relief.
• If you die at 75 or over, whoever inherits a pension also pays income tax on what they draw from it, at their own rate. The calculator estimates that at the basic rate, 20%. Before 75, they don’t.

A worked example

A couple own a £500,000 home and £300,000 of savings, with £400,000 left in pensions, and the home goes to their children. The second of them dies at 80.

Before April 2027 the estate is £800,000, within their £1,000,000 of allowances: no inheritance tax, and their children receive £1,120,000 after £80,000 of income tax on the pensions. From April 2027 the estate is £1,200,000: inheritance tax of £80,000, and the children receive about £1,045,000.

Bigger estates are hit harder. With a £700,000 home, £600,000 of savings and £900,000 in pensions, counting the pensions takes the estate over £2 million and cuts the residence band by £100,000: inheritance tax rises from £120,000 to £520,000.

Questions people ask

Which pensions count from April 2027?

Unused defined contribution pots — workplace and personal pensions, including money in drawdown — and most lump sums paid from pensions on death. Death-in-service benefits and pensions left to a husband, wife or civil partner don’t bring a tax bill.

Who pays the tax on the pension?

The personal representatives (executors) work it out and pay it, and can ask the pension scheme to pay the pension’s share directly.

Is there income tax as well as inheritance tax?

If the person who died was 75 or over, yes: heirs pay income tax on what they draw from the pension, on top of any inheritance tax. Before 75 they usually don’t.

Should I spend my pension first now?

It may change which pot it makes sense to draw first, but that depends on your whole plan. The full planner’s Inheritance & gifts tab compares the options against whether your money lasts. This is guidance, not advice.