For years, the advice to company directors was simple: pay into your pension. Contributions cut your corporation tax bill, the fund grew tax-free, and whatever you didn't spend passed to your family outside your estate for inheritance tax. That last part is about to change.
TL;DR: From 6 April 2027, most unused pension funds and pension death benefits count towards your estate for inheritance tax at 40%. The change is law under the Finance Act 2026. Spousal transfers and death-in-service payouts stay exempt. If you've been using a pension to pass wealth on tax-free, it's worth reviewing your plan now.
What's actually changing on 6 April 2027?
From 6 April 2027, most unused pension funds and pension death benefits will be included in the value of your estate for inheritance tax (GOV.UK technical note, 2026). Until then, a pension pot you haven't drawn typically sits outside your estate, so it escapes the 40% charge.
The measure was announced at the Autumn Budget 2024 and became law when the Finance Act 2026 received Royal Assent on 18 March 2026. It applies to deaths on or after 6 April 2027, regardless of whether the scheme trustees have discretion over who receives the benefit.
HMRC estimates around 10,500 extra estates will face an inheritance tax charge in 2027 to 2028, with the average bill rising by roughly £34,000 (GOV.UK, 2026).
Why does this matter if you run a company?
Because pensions have been one of the most efficient ways for directors to extract and pass on company wealth. Employer pension contributions are deductible against corporation tax, carry no National Insurance, and the fund itself grew without the 40% inheritance tax hanging over it on death.
In our experience, most director clients assumed a pension would always reach their children free of inheritance tax. That assumption no longer holds for deaths from April 2027. The pension is still a strong vehicle for funding your own retirement; what's changing is its value as a tax-free inheritance.
The nil-rate band remains £325,000 and the residence nil-rate band £175,000, both frozen until April 2031 (GOV.UK, 2025). Adding a pension pot on top of a house and business assets pushes many ordinary estates over those thresholds.
Which pension death benefits are caught, and which aren't?
Not everything falls into the net. The existing exemptions for inheritance tax still apply, so anything passing to a surviving spouse or civil partner remains exempt, as do gifts to a registered charity.
Two exclusions matter most for working families. Death-in-service benefits paid because the member was employed immediately before death stay outside the estate. Dependants' scheme pensions, paid as an ongoing income to a spouse, civil partner, child or financial dependant, are also excluded.
What is caught: uncrystallised (undrawn) personal pension and SIPP funds, drawdown funds you haven't used, and discretionary lump-sum death benefits paid to adult children or other non-exempt beneficiaries. If you've built a large self-invested pension intending to leave it to the next generation, that pot is squarely in scope.
Could the same pension really be taxed twice?
Yes, and this is the part that catches people out. Inheritance tax and income tax can both apply to the same pot when you die at or after age 75. The income tax treatment of death benefits is unchanged: benefits are tax-free if you die before 75, and taxable at the beneficiary's marginal rate if you die at 75 or older (GOV.UK technical note, 2026).
Take a director who dies at 78 with a £400,000 undrawn pension, leaving it to an adult child who pays higher-rate tax, with the estate's nil-rate band already used up by the family home.
- Inheritance tax at 40% on £400,000 takes £160,000, leaving £240,000.
- The child then pays 40% income tax on the £240,000 they draw, a further £96,000.
That's £256,000 of tax on a £400,000 pot, an effective rate of 64%. For an additional-rate beneficiary, the combined hit climbs higher still.
Reviewing your pension plan before 2027
Start with whether you're still over-funding a pension purely for inheritance reasons. When we review a director's profit-extraction plan, pensions still earn their place for retirement funding and corporation tax relief; the case for stacking up a pot you'll never spend is weaker now.
One question we hear often is whether spending or gifting during your lifetime makes more sense. Pensions used to be the asset you drew last; for some clients, drawing the pension earlier and using other reliefs or lifetime gifts may now leave less exposed to the 40% charge.
This is a planning question that touches your pension, your will, your company structure, and your wider estate. It's worth modelling the numbers before the rules bite, not after. A review of your director salary and dividend mix, your dividend tax position, and a wider financial health check all make sensible companions to a pension rethink.
Reporting and paying the new charge
Your personal representatives, the executors of your will or administrators of your estate, will be responsible for reporting and paying any inheritance tax due on pension funds from April 2027.
Pension scheme administrators will have to provide the value of in-scope benefits within 28 days of a request, and there'll be a mechanism letting personal representatives direct the scheme to pay the inheritance tax due straight to HMRC. That helps, but it adds a step to estate administration and means your executors need to know which schemes you hold. Keeping a clear, current record of your pension arrangements alongside your will is a small task that saves your family real time later.
Frequently Asked Questions
Does the April 2027 change affect pensions left to a spouse?
No. Funds and death benefits passing to a surviving spouse or civil partner remain exempt from inheritance tax, as they are now. The charge bites where the pension passes to adult children or other non-exempt beneficiaries.
Is death-in-service cover caught by the new rules?
No. Death-in-service benefits paid because you were employed immediately before death are excluded from your estate for inheritance tax. Most registered group life schemes should fall outside the charge, though it's worth confirming how yours is set up.
Should I stop paying into my pension now?
Not necessarily. Pensions still offer corporation tax relief on employer contributions and tax-free growth, which makes them efficient for funding your own retirement. The change affects the inheritance case for building a pot you don't intend to spend, so the answer depends on your goals rather than a blanket rule.
What happens if I die before 6 April 2027?
The current rules apply. Unused pension funds generally stay outside your estate for inheritance tax for deaths before 6 April 2027. The new treatment only applies to deaths on or after that date.
Will the nil-rate band rise to cover bigger estates?
No. The nil-rate band (£325,000) and residence nil-rate band (£175,000) are frozen until April 2031, so rising asset values pull more estates over the threshold each year even though the headline 40% rate hasn't changed.
If you've used your pension as part of how you pass on company wealth, the April 2027 change is worth getting ahead of. Get in touch and we'll model your pension, profit-extraction and estate position together, so you can decide what to adjust before the rules take effect.