Pensions from April 2027
Inheritance tax on pensions after 75: two taxes on one pot
When the member dies at 75 or over, the heir faces inheritance tax and then income tax on the same money. The Finance Act 2026 sets the order between them.
For a death on or after 6 April 2027 at the age of 75 or over, an inherited pension can be taxed twice. Inheritance tax comes first, because the unused pot is now part of the estate. Income tax follows when the beneficiary draws the money, at their own marginal rate, as it already did before the reform. Section 70 of the Finance Act 2026 adds section 567B to the Income Tax (Earnings and Pensions) Act 2003, which deducts the inheritance tax borne on the benefit from the taxable pension income, so income tax only bites on what inheritance tax left. On a slice taxed at 40 % for inheritance tax, the combined charge is 52 % for a basic rate heir, 64 % at the higher rate and 67 % at the additional rate. In the site's worked case, a £300,000 pot split between two children who each earn £45,000 leaves each of them £70,158 from a share of £150,000 if it is drawn in one tax year, after £22,500 of inheritance tax and £57,342 of income tax.
Inheritance tax, then income tax: the combined rate
You keep
£36,054
| Inheritance tax | £40,000 |
| Income tax on the rest | £23,946 |
| Combined tax rate | 63.9 % |
| Your marginal rate now | 20 % |
Income tax is charged on the pension after the inheritance tax borne on it (ITEPA s.567B).
Law read and sums checked by Radif Partners · Editorial policy · How the tax is worked out
The order of the two charges
Everything turns on sequence. The personal representatives value the estate at death, pension included, and the inheritance tax on it is worked out on the whole. The pension carries its share of that bill. Only later, often months later, does the beneficiary start drawing the inherited fund, and each payment is then taxed through PAYE as their income when the member was 75 or over, as GOV.UK explains for inherited pensions.
Without a link between the two, the beneficiary would pay income tax on money that had already gone to HMRC as inheritance tax. Section 70 of the Finance Act 2026 prevents that. The new section 567B gives a deduction from the taxable pension income equal to the inheritance tax attributable to the benefit that the beneficiary has borne. The result is a simple formula: the combined rate is the inheritance tax rate plus the income tax rate applied to whatever is left. With inheritance tax at 40 %, an heir at the higher rate loses 40 % plus 40 % of the remaining 60 %, which is 64 %.
A short illustration of what the deduction is worth: on £20,000 drawn by a beneficiary with £30,000 of other income, income tax on the full amount would be £4,000. With the inheritance tax on that slice deducted first, the taxable amount falls to £12,000 and the income tax to £2,400.
Combined rate for each income tax band
The heir's marginal rate is what matters, and it depends on their other income in the year of the withdrawal. The table takes a typical income in each band, asks the engine for the rate on the next pound, and combines it with inheritance tax at the full 40 % and at the average rate of the worked case below (15.0 %, because part of that estate falls within its bands). Scottish rates follow the GOV.UK table for 2026 to 2027; the rest of the UK uses the bands in the Budget 2025 rates annex.
| Heir’s band | Other income | Marginal income tax | With IHT at 40 % | With IHT at 15.0 % |
|---|---|---|---|---|
| Basic rate, England, Wales, NI | £30,000 | 20.0 % | 52.0 % | 32.0 % |
| Higher rate | £60,000 | 40.0 % | 64.0 % | 49.0 % |
| Personal Allowance being withdrawn | £110,000 | 60.0 % | 76.0 % | 66.0 % |
| Additional rate | £150,000 | 45.0 % | 67.0 % | 53.3 % |
| Scottish intermediate rate | £40,000 | 21.0 % | 52.6 % | 32.9 % |
| Scottish higher rate | £60,000 | 42.0 % | 65.2 % | 50.7 % |
| Scottish advanced rate | £90,000 | 45.0 % | 67.0 % | 53.3 % |
| Scottish top rate | £150,000 | 48.0 % | 68.8 % | 55.8 % |
Two rows stand out. Between £100,000 and £125,140 of income, the Personal Allowance is withdrawn at one pound for every two pounds earned, so each extra pound of pension costs income tax at the band rate plus the tax on the half pound of allowance lost. In England, Wales and Northern Ireland that produces the 60 % marginal rate in the table, and a combined rate of 76 % once inheritance tax has been taken. In Scotland the allowance is withdrawn in the same way, inside the advanced band, so the next pound there costs 67.5 %. The top Scottish rate of 48 % gives a combined 68.8 %, the highest figure for anyone above £125,140. The Scottish page works through those bands in more detail.
A worked case: two children, one pot
A divorced parent dies at 79 after 6 April 2027. The estate is a £300,000 home left to the two children, £200,000 of savings and a £300,000 drawdown fund that both children are nominated to share. Each child earns £45,000 a year. The engine finds inheritance tax of £120,000 on the estate, an average of 15.0 %, of which £45,000 is attributed to the pension.
| Death before 6 April 2027 | Death from 6 April 2027 | |
|---|---|---|
| Estate counted for inheritance tax | £500,000 | £800,000 |
| Nil-rate band and residence band used | £500,000 | £500,000 |
| Inheritance tax | £0 | £120,000 |
| of which on the pension | £0 | £45,000 |
| Income tax paid by the heirs on the pension | £134,934 | £114,684 |
| Each of 2 heirs keeps | £332,533 | £282,658 |
Each child's share of the pension is £150,000. After £22,500 of inheritance tax, £127,500 remains taxable as income. Taken as a single payment on top of a salary of £45,000, it runs through the higher rate band and into the zone where the Personal Allowance disappears, so the income tax comes to £57,342. Under the old rules, with the pension outside the estate, the same child would have paid £67,467 of income tax and nothing on the pension for inheritance tax.
Drawing the fund over several tax years
Once the deduction has been given, timing is the lever that remains. A lump sum taken in one tax year stacks on top of the heir's salary; the same amount drawn in instalments, where the scheme lets the beneficiary keep the fund in drawdown, uses the lower part of their bands each year. The table reruns the worked case with the taxable amount spread evenly.
| Fund drawn over | Income tax per child | Each child keeps from the pension | Total tax on the share |
|---|---|---|---|
| One tax year | £57,342 | £70,158 | 53.2 % |
| 2 tax years | £52,392 | £75,108 | 49.9 % |
| 3 tax years | £47,838 | £79,662 | 46.9 % |
| 5 tax years | £45,730 | £81,770 | 45.5 % |
| 10 tax years | £40,460 | £87,040 | 42.0 % |
Spread over five years, the income tax per child falls to £45,730 and each keeps £81,770. Beyond a certain point spreading stops helping: once every instalment sits wholly within the higher rate band, a longer period leaves the bill where it is. The calculation ignores investment growth while the money stays in the fund, and it assumes the heir's other income stays level, which a promotion, retirement or a second inheritance would change. The drawdown tax page shows the effect of a single withdrawal on a given income.
Scheme pays or heir pays: the same end figure
The inheritance tax on the pension can reach HMRC by several routes. The personal representatives may pay it out of the free estate and recover it from the beneficiary, the beneficiary may pay it from their own money, or either of them may give the scheme administrator a payment notice so that the scheme pays HMRC from the fund. Section 567B names each of these routes, so the deduction is available whichever one is used.
The arithmetic shows why the choice does not move the income tax. Suppose a child's share is £150,000 and the tax attributable to it is £22,500. If the scheme pays that tax, the fund the child draws is reduced to £127,500 and income tax falls on that smaller fund. If the child pays the tax from savings and draws the full £150,000, the deduction removes £22,500 from the taxable income. Either way the taxable amount is £127,500 and, drawn in one year, the income tax is £57,342. What differs is cash flow: paying from the pot avoids the heir finding the money first, while paying from savings leaves more invested inside the fund.
Repayments of inheritance tax
Inheritance tax figures are sometimes revised after the event. A valuation is corrected or a debt comes to light, and part of the tax is repaid. When the member died at 75 or over, a repayment of inheritance tax attributable to the pension is treated as taxable pension income of the beneficiary under section 579CB. The repayment is not lost, but it is no longer tax free: it reverses part of the deduction the heir has already had, at their marginal rate in the year it arrives.
Where neither charge applies
Three situations break the pattern. A pension left to a spouse or civil partner is exempt from inheritance tax, although the survivor still pays income tax on drawings after a death at 75 or over. A lump sum death benefit paid to a charity is free of both taxes, even after 75, as HMRC’s technical note confirms, and it counts towards the 10 % test for the reduced 36 % rate on the rest of the estate. And a dependants' scheme pension from a defined benefit scheme is excluded from the estate altogether, while being taxed as income. Deaths before 75 follow different income tax rules, set out on the page on deaths before 75.
The sums on this page describe how the two taxes interact; they are not a recommendation about when to draw a pension, whom to nominate or how a beneficiary should take an inherited fund. Those choices depend on the whole estate and on each heir's income, and the personal representatives, a solicitor or a regulated financial adviser are the people to check a real case. The full calculator runs any estate with its heirs.