Inheritance tax on pensions calculator

The calculator works out inheritance tax on one death twice: under the rules for deaths before 6 April 2027, when most pensions sit outside the estate, and under the rules from that date, when unused pension funds and most pension death benefits are added to it.

It adds up the estate net of debts, takes off anything left to a spouse or civil partner, then the residence nil-rate band and the nil-rate band, and charges 40% on the rest. The nil-rate band is £325,000. The residence nil-rate band is £175,000, available when the home goes to children or grandchildren, capped at the home's value after its mortgage, and reduced by £1 for every £2 the estate is worth over £2M. Both bands are frozen until April 2031. A widow or widower can add up to 100% of each band from their late spouse, in proportion to what was left unused.

The pension bears its share of the bill in proportion to its value in the chargeable estate, as the rest of the estate does. Where death is at 75 or over, the beneficiary's income tax is then charged on what's left of the pension after its inheritance tax, at the rate of the band you pick.

This calculator assumes defined contribution pensions, that every asset passes on death rather than having been given away, and that nothing goes to charity. It leaves out lifetime gifts, business and agricultural relief, the downsizing addition to the residence band, and the income tax that applies on a death before 75 when lump sums exceed £1,073,100 or aren't paid within two years. It is an illustration, not advice on any estate.

Until 5 April 2027, most defined contribution pensions pass outside the estate because the scheme's trustees decide who receives them. That made a pension one of the few large assets that could pass on free of inheritance tax.

The Finance Act 2026 changes that for deaths on or after 6 April 2027. Unused funds and most lump sum death benefits are added to the estate and share its nil-rate bands. The pension also counts towards the £2M test for the residence nil-rate band, so an estate that sits under £2M without the pension may lose part or all of that band with it.

The personal representatives become responsible for finding out what pensions exist, getting their values from each scheme, and reporting and paying the tax with the rest of the estate. Inheritance tax is due six months after the end of the month of death, with interest charged after that, and gathering pension values from each scheme takes part of that time.

HMRC is still publishing technical detail, including how beneficiaries obtain income tax relief on lump sums that bore inheritance tax. Expect some of the mechanics to be confirmed before April 2027.

On a death before 75, inherited pension money is usually free of income tax. On a death at 75 or over, the beneficiary pays income tax at their marginal rate on what they draw. That stays the same in 2027; what's new is the inheritance tax before it.

The two are not simply stacked. The part of the pension used to pay inheritance tax isn't also taxed as the beneficiary's income, so a £100,000 pension taxed at the full 40% leaves £60,000, and a higher-rate beneficiary pays 40% of that, £24,000. Together that's 64%; for an additional-rate beneficiary, 67%. In practice the nil-rate bands are spread across the whole estate, so the pension's share is usually lower, which is what the calculator shows.

These are the routes people often discuss with an adviser. Each has conditions and trade-offs, and none suits every estate.

• Spouse or civil partner exemption. Anything left to a spouse or civil partner, pensions included, is free of inheritance tax, and the unused bands pass to the survivor. The tax is often deferred to the second death rather than avoided.
• Gifts out of surplus income. Regular gifts made from income, not capital, that leave the giver's standard of living unchanged are exempt straight away. Records of income and spending matter here.
• Lifetime gifts and the seven-year rule. Gifts to people fall out of the estate if the giver lives seven more years. Where tax is due on a gift made three to seven years before death, it is reduced on a sliding scale. The first £3,000 of gifts each tax year is exempt regardless.
• Leaving to charity. Gifts to charity are exempt, and if at least 10% of the net estate goes to charity the rest is taxed at 36% rather than 40%. Pensions can be paid to a charity as a charity lump sum death benefit.
• Life cover written in trust. A policy written in trust pays out outside the estate and can give beneficiaries money to meet the bill.

Estate planning depends on circumstances a calculator can't see. For a decision about your own estate, speak to a regulated financial adviser or a solicitor who specialises in wills and estates.