The 67% pension tax: how April 2027 stacks two taxes on one pot (UK)

30 August 2026 · Inherit Vault

Forty per cent inheritance tax, then forty five per cent income tax, and somehow the answer isn't eighty five. It's sixty seven. From 6 April 2027 the same pension pot can be hit by both, and the way the two stack is the bit almost nobody has worked out.

Why there are suddenly two taxes

Until now a leftover pension pot has sat outside the estate. That stops on 6 April 2027, when most unused pension funds and death benefits get counted in the estate for inheritance tax, under legislation in Finance Act 2026. The income tax rules on inherited pensions haven't changed at all. If the member died at 75 or over, the provider deducts income tax at the beneficiary's own rate on whatever they take out. Two separate taxes, same money, in that order. What actually changes in April 2027 is here.

They stack, they don't add

Income tax only bites on what's left after inheritance tax has gone. That's why 40 plus 45 isn't 85. Take £100,000 of leftover pot, in an estate that's already used up its allowances. Inheritance tax at 40% takes £40,000 and leaves £60,000. If the beneficiary pays the additional rate, income tax at 45% takes £27,000 of that. Total gone: £67,000. The family keeps £33,000 of the original £100,000.

The same pot, at every band

The final number depends entirely on who inherits. A basic rate beneficiary pays 20% on the remaining £60,000, so £52,000 goes and 48% survives. A higher rate beneficiary pays 40% of the £60,000, for a combined 64%. The additional rate, on income over £125,140, produces the 67%. In Scotland the top rate is 48%, so the combined figure is 68.8%. Nobody pays 85%. But 67% is real, and it lands on ordinary families with a decent pot and a well paid child.

The trap: the withdrawal sets the band

Beneficiaries assume they'll pay their usual rate. The money is income in the year they take it, so a big withdrawal can push them up a band or two on the way through. There's a worse step in the middle. Once adjusted net income passes £100,000, the personal allowance drops by £1 for every £2 above it, which creates an effective 60% band up to £125,140. Taking the money over several tax years instead of one can be worth thousands. That's a decision the beneficiary controls, not the executor.

Who doesn't get caught by any of it

Plenty of people won't. Anything passing to a husband, wife or civil partner is still exempt from inheritance tax, pension included. Death in service benefits paid from a registered pension scheme stay out of the estate entirely, and so do dependants' scheme pensions from defined benefit or collective money purchase arrangements. And if the member died before 75, most lump sums still come out with no income tax within the lump sum and death benefit allowance, so only the inheritance tax layer applies. Age at death is the single biggest variable in the whole calculation.

What HMRC published this week

On 27 August 2026 HMRC put out a second technical note on how this will run. It covers how unused funds and death benefits are treated as "notional pension property", the information sharing duties between schemes and executors, how withholding notices and pensions direct payment scheme notices operate, and clearance. Executors are liable for reporting and paying, not the pension provider. They can direct a scheme to hold back 50% of the taxable benefits for up to 15 months from the date of death and pay HMRC first. That lever doesn't apply to exempt benefits, funds under £1,000, or annuities already in payment.

Clearance, and the pension nobody knew about

Here's the part that should worry every executor. They can be discharged from liability for a pension found after clearance, but only if HMRC is satisfied they made every effort to locate the deceased's pensions. Every effort, on schemes they've never heard of, for someone who can't be asked. The Pension Tracing Service only works if you can name the employer or provider. A pot that turns up two years later doesn't just create a tax bill, it can reopen an estate everyone thought was closed.

The deadline doesn't move

None of this changes when the money is due. Inheritance tax has to be paid by the end of the sixth month after the month of death, with interest after that, and you normally have to pay before probate is granted. So the executor is expected to find every pension, value it, and fund the bill on money nobody can release yet, which is the usual bind. The 50% hold exists because the alternative is executors paying out of their own pockets.

It isn't landing on its own

The nil rate band is still £325,000, and April 2026 already tightened business and agricultural relief. The pension change is the one that reaches the most ordinary estates, because it applies to a pot most people never thought of as taxable in the first place.

Sixty seven per cent is the ceiling, and for most families the real figure will be lower. What isn't optional is the finding. From April 2027 an executor has to locate every pension you ever paid into, or they can't get clearance and can't safely close the estate. Pensions were already the asset most likely to go missing. A written list of every scheme, provider and policy number won't cut the tax by a penny. It just stops the bill landing on people who have no idea where to look.

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