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Your pension and inheritance tax

Until 5 April 2027, money left in a pension sits outside the estate for inheritance tax. A plan built on that, spending other savings first and leaving the pension to pass on, is affected by the change.

6 min read · 24 September 2026 · Written for business owners

What is changing

For deaths on or after 6 April 2027, most unused pension funds and death benefits count as part of your estate for inheritance tax (Finance Act 2026; HMRC technical note, Inheritance Tax on pensions, 11 May 2026). The Act received Royal Assent on 18 March 2026. Death-in-service benefits, dependants’ scheme pensions and lump sums paid to charity are excluded. Anything passing to a spouse or civil partner stays exempt, as it does for the rest of the estate. The pension part of the estate gets no business property relief or agricultural relief, and the instalment option does not apply to it.

Who is affected

£325,000
the nil-rate band, frozen to 5 April 2031
£175,000
the residence nil-rate band, frozen to 5 April 2031
40%
inheritance tax above the available bands

Budget 2025, Overview of tax legislation and rates, gov.uk.

The rules that stay the same

Employer contributions are still normally deductible for the company, with no national insurance and no income tax when paid in. Growth inside the pension is still free of income tax and capital gains tax.

Taking money out of the pension

Withdrawing money from a pension has its own tax cost.

Withdrawals above the tax-free lump sum are taxed as income in the year they are taken. A large withdrawal can be taxed at 40% or 45%, and income over £100,000 reduces the personal allowance by £1 for every £2, so it is gone at £125,140 (gov.uk, Income Tax rates and Personal Allowances). Inheritance tax is 40% on the value above the available nil-rate bands. A financial adviser can compare the two on your figures.

Money taken out is no longer there to fund your retirement. What is right depends on the size of the estate, what else is in it, your health and age, and what your family needs.

Timing

The change applies from 6 April 2027. Reviewing a will, making gifts and working out how business property relief fits with the rest of the estate all take time.

A couple reading a letter together in their kitchen

Questions and answers

Does this apply to all pensions?

It applies to most unused pension funds and death benefits, whatever the type of scheme. Death-in-service benefits, dependants’ scheme pensions and lump sums paid to charity are excluded (HMRC technical note, Inheritance Tax on pensions). Your scheme can tell you which benefits it would pay.

Does my will need changing?

A solicitor can review the will and the pension nomination together. A will written on the old basis may now produce a different result from the one intended.

What about gifting instead?

Gifts made more than seven years before death fall outside the estate (gov.uk, Inheritance Tax: gifts). Whether gifting suits you is a question for a financial adviser.

Can I wait to see if the rules change again?

The change is law and applies from 6 April 2027. A review can be done now on the rules as they stand.

What to do next

  1. Ask your accountant whether your estate is likely to be affected. They can give an approximate answer from what they already know.
  2. If it is, the will, the business and the pension need looking at together. That involves a solicitor and a regulated financial adviser as well as your accountant, and your accountant can introduce you.

This sheet explains how the rules work. It is not advice, and it does not take your circumstances into account. Your accountant can talk it through with you and can introduce you to a regulated financial adviser.