Pension Inheritance Tax Calculator - 2027 Rules

Yes - from 6 April 2027 most unused pension funds and death benefits will be counted as part of your estate for Inheritance Tax (IHT). This is one of the biggest changes to estate planning in a generation, announced at the Autumn Budget 2024. Whether you actually pay anything depends on the size of your whole estate: IHT is charged at 40% on the value above your available allowances, after the usual exemptions. A spouse or civil partner still inherits everything tax-free, but money you intend to pass to children or grandchildren via your pension could now lose a large slice to tax.

This page explains exactly what changes in 2027, who is affected, and how to estimate the bill. Use it alongside our inheritance tax calculator to model your full estate.

Key facts: pension inheritance tax in 2027

• From 6 April 2027, most unused pension funds and death benefits are included in your estate for Inheritance Tax.
• The standard IHT rate is 40% on the value of your estate above the available allowances.
• Everyone has a nil-rate band of £325,000, plus a residence nil-rate band of £175,000 if you leave a home to direct descendants.
• Transfers to a spouse or civil partner remain completely IHT-free, including pension funds.
• The Government estimates that of around 213,000 estates with inheritable pension wealth in 2027–28, about 10,500 will pay IHT for the first time and roughly 38,500 will pay more - with the average bill rising by around £34,000.
• If you die after age 75, your beneficiaries also pay Income Tax at their marginal rate when they draw the inherited pension - on top of any IHT.
• Death-in-service benefits and dependants' scheme pensions from defined benefit or collective money purchase schemes are excluded.

How the pension inheritance tax calculator works

A pension inheritance tax calculator brings together two things that used to be treated separately: the value of your taxable estate (property, savings, investments, business assets) and the value of your unused pension funds and death benefits. Before April 2027, most defined contribution pensions sat outside your estate and could pass to beneficiaries free of IHT. From that date, the pension is added back in - so the calculation has to look at the whole picture.

In practical terms, the pension inheritance tax calculator works in four steps. First, it totals your estate excluding the pension, to give a baseline. Second, it adds your unused pension pot to show the new 2027 position - this is the heart of pension iht 2027 planning. Third, it deducts your available allowances: the £325,000 nil-rate band and, where you leave a qualifying home to children or grandchildren, the £175,000 residence nil-rate band. Fourth, it applies 40% to whatever remains, then flags the separate Income Tax beneficiaries may face if you die after 75.

Two refinements matter. The residence nil-rate band is tapered away by £1 for every £2 that your estate exceeds £2 million - and because the pension now counts toward that £2 million threshold, adding a large pot can quietly erase the £175,000 allowance entirely. And any value passing to a surviving spouse or civil partner is stripped out before tax is calculated, because those transfers stay IHT-free.

How much is pension inheritance tax from 2027?

There is no separate "pension IHT" rate. Your pension in estate IHT exposure is simply your normal 40% charge, recalculated now that the pension forms part of the estate. The headline question is whether including the pot pushes your total above the allowances - and, for larger estates, whether it triggers the £2 million taper.

The table below shows three illustrative estates and how the same pension changes the outcome. Figures assume a single person (one nil-rate band and, where a home passes to children, one residence nil-rate band), death before age 75, and no spousal exemption.

In the second row, a modest estate that paid nothing before now faces a £60,000 bill purely because the £200,000 pension is dragged into charge. The bottom row shows the taper at work: the larger combined value erodes the residence nil-rate band, so the extra tax exceeds 40% of the pension alone. These are simplified examples - model your own position with the inheritance tax calculator and our pension pot calculator.

Which pensions are caught - and which are not?

The rules target unused pension inheritance tax - money left in your pension when you die rather than spent in retirement. Most defined contribution pots, including SIPPs, personal pensions and unused drawdown funds, are within scope. So are most lump-sum death benefits paid from those schemes.

Some benefits are specifically excluded. Death-in-service benefits paid through a registered pension scheme remain outside the estate, as do dependants' scheme pensions paid from defined benefit or collective money purchase arrangements. A traditional final-salary pension that pays a continuing income to a spouse or dependant is therefore treated very differently from a pot of cash sitting in a SIPP. If you are not sure which category your scheme falls into, ask the administrator in writing - the distinction can be worth tens of thousands of pounds.

The double hit after age 75

Age 75 is the pivot point for pension death benefits tax. If you die before 75, beneficiaries can usually draw the inherited pot free of Income Tax (the IHT charge from 2027 still applies). If you die at or after 75, they pay Income Tax at their own marginal rate as they withdraw - and the pot may already have suffered 40% IHT. For a higher-rate beneficiary, the combined effect on each pound of pension can be severe, which is why timing and drawdown strategy now matter so much. Our pension drawdown calculator and pension lump sum tax calculator help you see the Income Tax side of the equation.

Who pays the tax and how is it collected?

From 2027 the responsibility sits with your personal representatives - the executors or administrators of your estate - not with the pension scheme. They must report the pension value to HMRC and settle the IHT due. To fund it, they can direct the pension scheme to pay HMRC from the pot. A scheme can also issue a withholding notice, holding back up to 50% of the funds for up to 15 months, so that tax can be met before the balance is released to beneficiaries.

This is a meaningful administrative shift. Executors will need accurate, timely information from every pension provider before they can finalise the IHT return, and beneficiaries may wait longer to receive money while the tax position is settled. Good record-keeping - a clear list of schemes, providers and nominated beneficiaries - will make life far easier for whoever administers your estate.

How to reduce inheritance tax on your pension

The 2027 change does not remove your planning options - it makes using them earlier more valuable. None of the following is advice for your specific circumstances, but each is a lever worth discussing with a qualified adviser.

• Spend it, in the right order. Because pensions are now in the estate, the old "draw other assets first, leave the pension untouched" strategy is reversed for many people. Drawing a sustainable income from the pension during retirement reduces the unused balance exposed to IHT. Model sustainable withdrawal rates with the pension drawdown calculator.
• Use your spouse exemption deliberately. Leaving the pension to a spouse or civil partner defers IHT entirely, and unused nil-rate bands can pass between spouses. The trade-off is the tax position on the second death - plan for both.
• Make use of gift allowances. Regular gifts out of surplus pension income can fall within the "normal expenditure out of income" exemption, and other lifetime gifts may drop out of your estate after seven years. Drawing income to fund such gifts can be more efficient than leaving the pot to grow.
• Consider the after-75 income tax trap. If you are over 75, weigh up drawing and gifting now against leaving funds for beneficiaries to be taxed twice. Run the numbers with the pension lump sum tax calculator and income tax calculator.
• Protect your residence nil-rate band. Because the pension counts toward the £2 million taper threshold, a large pot can quietly cost you the £175,000 allowance. Keeping the combined total below £2 million preserves it.
• Review business and agricultural assets separately. If your estate includes a trading business, qualifying assets may attract relief - see the business property relief calculator before assuming the full 40% applies.

For the official position, see HMRC's guidance on unused pension funds and death benefits and the general rules on Inheritance Tax.

Why this matters now, not in 2027

The change takes effect from 6 April 2027, but planning takes time and many of the most effective tools - gifting, drawdown sequencing, spousal structuring - work best over several years. Estates that never expected to pay IHT may now be drawn in, and those already exposed could see bills rise by tens of thousands of pounds. Modelling your position early gives you the room to act while the options are still open. Start with the inheritance tax calculator and pension pot calculator to see where you stand under the new rules.

This article is general information about UK Inheritance Tax and pensions for the 2026/27 tax year and the rules taking effect from 6 April 2027. It is not personal financial, tax or legal advice. Allowances, thresholds and your own circumstances will affect the outcome - speak to a qualified adviser or accountant before acting.

Who should use this calculator

From April 2027, unused pension pots are expected to fall within the estate for Inheritance Tax. That is a fundamental change: pensions have long been the most efficient asset to pass on, sitting outside the estate entirely, and many people’s plans were built around exactly that.

The effect is that a pension left untouched could face 40% IHT and then Income Tax when the beneficiary draws it. This models the estate position under the new treatment so you can see the scale of the change, which for some estates reverses the whole logic of spending other assets first.

What this calculator assumes

• Unused pension funds are treated as part of the estate for Inheritance Tax from the expected 2027 start.
• The nil-rate band of £325,000 and residence nil-rate band of £175,000 apply as usual, with tax at 40% above.
• Transfers to a spouse or civil partner remain exempt.
• The projection uses the values you enter at today’s figures.

Limitations — what it does not cover

• Final legislation. The detail is subject to change before implementation — treat this as scenario planning, not settled law.
• Income Tax for beneficiaries, which applies in addition where the member died after 75, producing a compounded effective rate.
• Death before 75, which currently allows tax-free beneficiary drawdown.
• Planning responses — drawing pension earlier, gifting, or life cover in trust — which need advice.
• Business and Agricultural Property Relief changes announced alongside.
• The residence nil-rate band taper above £2 million, which a pension added to the estate can trigger.