Worked estates
A £500,000 pension pot: two taxes, then what each heir keeps
When the pot is the largest thing someone owns, it now pays its share of inheritance tax. If they die at 75 or over, the children pay income tax on what remains.
Inheritance tax on a death from 6 April 2027
£120,000
That is £120,000 more than for a death before that date, because the pension now counts.
| Before 6/4/27 | From 6/4/27 | |
|---|---|---|
| Estate counted | £300,000 | £800,000 |
| Tax-free bands used | £500,000 | £500,000 |
| Inheritance tax at 40.0 % | £0 | £120,000 |
| of which on the pension | £0 | £75,000 |
| Heirs’ income tax on the pension | £228,542 | £194,792 |
| Each of 2 heirs keeps | £285,729 | £242,604 |
Of each £100 of pension passed on, tax takes £54 from April 2027, against £46 before.
Residence band £175,000. Estimate only, not advice.
A large pension left by someone who dies at 75 or over is taxed twice from 6 April 2027. Take a single mother with a £250,000 home, £50,000 of savings and £500,000 still invested in her pension, dying at 78 and leaving everything to two children who each earn £60,000. Before the reform her estate was £300,000 and paid nothing. From that date it is £800,000, owes £120,000 of inheritance tax, and £75,000 of that is charged on the pension. Each child's half of the pot is £250,000; after £37,500 of inheritance tax, £212,500 is taxable as their income. Drawn in a single tax year on top of a salary, it costs each of them £97,396 of income tax. Each child ends up with £115,104 from the pension and £242,604 in all, against £285,729 under the old rules. Section 70 of the Finance Act 2026 lets the inheritance tax borne come off the taxable amount, which stops the two taxes from overlapping in full.
Law read and sums checked by Radif Partners · Editorial policy · How the tax is worked out
Why the pot carries most of the bill
Inheritance tax is charged on the estate as a whole and then shared out in proportion to value. Here the pension is 63 % of the estate counted from 6 April 2027, so it carries that share of the £120,000. The house and savings would have fitted inside the £500,000 of bands on their own; the pot is what creates the tax. Section 150A treats the unused fund as the mother's property just before death, even though the scheme pays it directly to the children.
One child's share, step by step
| Step | Amount |
|---|---|
| Each child’s half of the pension | £250,000 |
| Inheritance tax borne on that half | £37,500 |
| Taxable as income after the deduction | £212,500 |
| Income tax, drawn in one tax year | £97,396 |
| Kept from the pension | £115,104 |
| Share of the house and savings after tax | £127,500 |
The deduction comes from section 70 of the Finance Act 2026, which inserts section 567B into the income tax rules on pensions: where a beneficiary has borne inheritance tax on a pension death benefit, that tax comes off the pension income before income tax is worked out. GOV.UK confirms that payments from a member who died at 75 or over are taxed as the beneficiary's income.
Drawing the inheritance more slowly
A salary of £60,000 already reaches the higher rate band, and a six-figure pension payment on top of it goes through the stretch where the Personal Allowance is lost. Spreading the drawings over several tax years keeps more of each year's slice in lower bands, where the scheme allows it.
| Years drawn over | Income tax per child | Kept from the pension | Total tax on the pension |
|---|---|---|---|
| 1 | £97,396 | £115,104 | 54.0 % |
| 3 | £100,938 | £111,562 | 55.4 % |
| 5 | £87,500 | £125,000 | 50.0 % |
| 10 | £85,000 | £127,500 | 49.0 % |
The whole estate at a glance
The ledger uses the calculator's inputs: single, £250,000 home to the children, £50,000 saved, £500,000 pension, death at 78, two heirs on £60,000.
| Death before 6 April 2027 | Death from 6 April 2027 | |
|---|---|---|
| Estate counted for inheritance tax | £300,000 | £800,000 |
| Nil-rate band and residence band used | £500,000 | £500,000 |
| Inheritance tax | £0 | £120,000 |
| of which on the pension | £0 | £75,000 |
| Income tax paid by the heirs on the pension | £228,542 | £194,792 |
| Each of 2 heirs keeps | £285,729 | £242,604 |
HMRC's technical note describes how the executors can ask the scheme to hold back part of each benefit or pay the tax directly, which the who pays page explains. The pension or ISA comparison and the after 75 guide go further into the second tax. The rate of 40 % and the income tax bands are fixed by law; the rest of this page is an illustration, and for a real family the executors and a regulated adviser check every figure.