The short answer: For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will count as part of your estate for inheritance tax. This is already law. The Autumn Budget on 28 October 2026 kept the start date and the main allowances as they were, and added a few changes to how the tax is paid and collected. Many estates will still have no inheritance tax to pay, but pensions will now be part of the calculation.
Updated 29 October 2026, after the Autumn Budget. This is general information, not advice.
What is changing for pensions and inheritance tax?
Inheritance tax is a tax on the estate (the property, money and possessions) of someone who has died. At the moment, most pensions sit outside your estate, because the provider or trustees usually have discretion over who receives the money after you die.
For deaths on or after 6 April 2027, that will no longer decide the matter. Most unused pension funds and pension death benefits will be added to the value of your estate, whether or not the scheme has discretion. The rules are already in the Finance Act 2026, which received Royal Assent on 18 March 2026.
If someone dies before 6 April 2027, the current rules apply, even if the pension is paid out after that date.
What did the Autumn Budget 2026 change?
The Budget did not move the start date. It announced some smaller changes. These will be put into law in the Finance Bill 2026-27, so they are announced rather than final:
- Where there is no Will or named executor, people likely to become personal representatives will be able to tell a pension scheme to pay the inheritance tax straight to HMRC, from 6 April 2027.
- Those dealing with an estate will be able to choose whether pension funds count as part of the main estate or as a separate part when testing for the reduced 36% rate, which applies when at least 10% of an estate is left to charity. This also starts on 6 April 2027.
- The “two-year rule” is to be removed. Tax-free pension death benefits will no longer become taxable just because they are paid more than two years after the scheme first knew, or should have known, of the death. This applies to payments made on or after 28 October 2026.
- If someone dies before 75 and lump sums paid out go above their lump sum and death benefit allowance, HMRC will charge each beneficiary tax on their share of the excess at their own income tax rate. This will be backdated to payments made from 6 April 2024.
Which pension benefits are not included?
- Death in service benefits paid from a registered pension scheme linked to your current job
- Dependants’ scheme pensions, which are pensions paid to a dependant, such as a spouse or child
- Joint life annuities that were bought together with your own annuity
Benefits from a previous employer’s scheme do not count as death in service. The usual exemptions also continue: pension benefits passing to a surviving spouse, civil partner or charity are normally exempt.
Will my estate pay inheritance tax?
Inheritance tax is only charged on the part of an estate above the available allowances. The standard rate is 40%.
- The nil rate band is the basic tax-free threshold of £325,000
- The residence nil rate band adds up to £175,000 if you leave your home, or a share of it, to your children or grandchildren
- The residence nil rate band is reduced by £1 for every £2 that the estate is worth over £2 million
- Unused allowances can pass to a surviving spouse or civil partner, so a couple who leave their home to their children or grandchildren may be able to pass on up to £1 million without inheritance tax, if the estate is worth less than £2 million
These thresholds are frozen by law up to and including the 2030 to 2031 tax year. The Budget documents published on 28 October 2026 contain no change to them.
A simple illustration
Take someone with no unused allowance from a late spouse. They own a home worth £450,000, have £150,000 in savings and a £250,000 pension, and leave everything to their children. Their allowances come to £500,000.
- Today, the pension sits outside the estate. The estate is £600,000, so the tax is 40% of £100,000, which is £40,000.
- From April 2027, the pension counts. The estate is £850,000, so the tax is 40% of £350,000, which is £140,000.
The pension adds £100,000 of tax here. This is an illustration only, and ignores gifts, income tax and other factors.
Who reports and pays the tax, and when?
The personal representatives (the executors named in a Will, or the people dealing with the estate if there is no Will) report and pay any inheritance tax due on pensions. Pension providers supply information but are not normally liable. Once a beneficiary has been decided, they also become liable, together with the personal representatives, for the tax on their share.
The tax is due by the end of the sixth month after the date of death. HMRC charges interest after that, and the tax cannot be paid in instalments. To help, personal representatives can:
- Ask the scheme to hold back up to 50% of each beneficiary’s benefits for up to 15 months after the end of the month of death
- Ask the scheme to pay the tax directly to HMRC from the pension, for amounts of at least £1,000
HMRC has said more guidance will follow before April 2027.
Does income tax still apply to an inherited pension?
In many cases, yes. It depends on how old you were when you died:
- Before 75: benefits can often be paid tax-free, within the lump sum and death benefit allowance
- After 75: beneficiaries usually pay income tax at their own rate on what they take
Where inheritance tax is paid on pension benefits, the part used to pay that tax is not also counted as taxable income for the beneficiary. HMRC is still to publish full guidance on how this works in practice.
The tax-free cash you can take from your own pension in your lifetime is a separate matter. You can usually take up to 25% tax-free, with a limit of £268,275 for most people, and the Budget did not change this. Our guide to tax-free cash from your pension explains more.
What could you review now?
Everyone’s circumstances are different. You could consider:
- Who your pension beneficiaries are, and whether your expression of wish forms are up to date
- A clear record of all your pensions, to help whoever deals with your estate
- How your pension fits with your Will and wider estate plan
- Speaking to a financial adviser before changing how you use your pension
Our guide to what happens to your pension when you die covers nominations and the wider picture.
Summary
- From 6 April 2027, most unused pension funds count as part of your estate for inheritance tax
- Death in service benefits and dependants’ scheme pensions are excluded, and spouse and charity exemptions still apply
- Personal representatives report and pay the tax, due by the end of the sixth month after death
Frequently asked questions
When do the new inheritance tax rules for pensions start?
They apply to deaths on or after 6 April 2027. Before that date, the current rules apply, even if the pension is paid out afterwards.
Is death in service included?
No. Death in service benefits linked to your current job are excluded. Benefits from previous employers’ schemes are not.
Is there inheritance tax if my pension goes to my spouse?
Normally no. There is a limit if you are a long-term UK resident and your spouse or civil partner is not: the exemption is then capped at the nil rate band, currently £325,000. What they inherit also becomes part of their own estate later.
Did the Budget change the inheritance tax allowances?
No. The Budget documents contain no change to them. The nil rate band is £325,000 and the residence nil rate band is up to £175,000. Both are frozen up to and including the 2030 to 2031 tax year.
Will my beneficiaries pay income tax as well?
They may, depending on your age when you die and how the benefits are taken. The rules are designed so that the part used to pay inheritance tax is not also taxed as income.
Need help with pensions and inheritance tax?
For many people, a pension is a large part of their wealth, so it is worth looking at it alongside the rest of their estate. We are independent financial advisers, helping people in Hailsham, Eastbourne and across East Sussex and Kent. You can find out more about our Inheritance Tax Planning in East Sussex service, our pension advice in East Sussex and our wider pensions and investments work.
Call 01323 335099 or email info@coastlinefinancial.co.uk for a free, no-obligation initial conversation.
The value of investments and the income from them can fall as well as rise, and you may get back less than you invested. This includes pension funds. Tax treatment depends on individual circumstances and may change in the future. The Financial Conduct Authority does not regulate tax or estate planning. Some of the Budget changes described here are still to become law. This article is general information, not personal advice, and reflects information published up to 29 October 2026.