Question to the HM Treasury:

To ask the Chancellor of the Exchequer, pursuant to Question 121253, what assessment has been made of the potential impact on beneficiaries of them paying a net tax rate of 68% when the pension holder passes away after the age of 75 resulting in a 40% inheritance tax and a 45% income tax charge on the remaining private pension.

More than 90 per cent of UK estates will continue to have no inheritance tax liability in 2030-31 following the reforms to the inheritance tax treatment of pensions. The reforms will only affect a minority of those with inheritable pension wealth.

Income tax is only due from beneficiaries in certain circumstances. It is due at the beneficiary’s marginal income tax rate. Significant tax relief is provided on pension contributions when payments are made into a pension because the Government wishes to encourage pension saving to help ensure that people have an income, or funds on which they can draw, throughout retirement. In cases where income tax is due on pension benefits paid to a beneficiary, contributions into the pension scheme will have received this tax relief when they were made. If the pension benefits had been withdrawn by the original member, they would have been liable to income tax. If the original member died with the cash, or assets purchased with that cash, then this would then generally be included in the valuation of their estate for inheritance tax purposes too and inheritance tax paid if appropriate.

Income tax will not be due on the amount of relevant death benefits equal to any inheritance tax due on that pension death benefit. This means the same value will not be subject to both inheritance tax and income tax. For example, if beneficiaries choose to withdraw their taxable benefits and pay income tax on the full amount, the legislation provides for them to reduce their taxable pension income by any inheritance tax paid. Guidance on this will be published in due course ahead of the changes taking effect in April 2027.