Death in service benefits and inheritance tax

Q: What does a worked example look like?

Illustration only. Priya dies in June 2027, aged 50 and still employed. Her employer's money purchase scheme holds a pot of £150,000 and pays a death in service benefit of four times her £60,000 salary, £240,000. She also has a deferred pot of £80,000 from a previous job. Her notional pension property is £230,000, the two pots, and that is added to the rest of her estate. The £240,000 is an excluded benefit and adds nothing to the inheritance tax calculation, whoever the trustees pay it to.

For deaths on or after 6 April 2027, a death in service benefit paid by a registered pension scheme stays outside the estate for inheritance tax, whether or not the scheme has discretion over who receives it. The exclusion covers only the part that is payable because the member was in work immediately before death, so a refund of contributions or the value of a defined contribution pot paid alongside it still counts as part of the estate.

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How are death in service lump sums treated now?

For deaths before 6 April 2027 the existing rules apply, even if the benefit is paid after that date. Most lump sum death benefits, including death in service lump sums, are paid at the discretion of the scheme trustees or provider, and are then not part of the member’s estate, even where they follow the member’s letter of wishes (IHTM17051, IHTM17052). A lump sum does fall into the estate where it is payable to the estate as of right or the member could make a binding nomination, because the member then had a general power over it under section 5(2) of the Inheritance Tax Act 1984 (IHTA 1984).

Some schemes are not discretionary. The government’s consultation response notes that death in service benefits paid by schemes such as the NHS and other public sector schemes are currently within the scope of inheritance tax. Where a benefit is part of the estate, the spouse or civil partner exemption can still apply if it is paid to them. While a lump sum is held by a registered scheme, including between death and payment, it is not relevant property for the trust charges (IHTM17038, IHTM17083).

What changes from 6 April 2027?

Section 66 of the Finance Act 2026 inserts section 150A into IHTA 1984. A member of a registered pension scheme, a qualifying non UK pension scheme or a section 615(3) scheme is treated as beneficially entitled immediately before death to notional pension property, valued from the scheme arrangements at that moment. Section 150A(4) then says no other interest in such a scheme is taken into account in valuing the estate, so the old general power route no longer applies to these schemes.

The value of notional pension property excludes any benefit that may only be paid as an excluded benefit. Section 150A(6)(d) makes this an excluded benefit: any amount payable as a benefit, in any form, if the member is in employment or other work of a particular description immediately before death, and not payable if the member does not meet those conditions. HMRC’s policy paper confirms that death in service benefits from both discretionary and non discretionary registered schemes are excluded, which brings public sector schemes out of scope for the first time.

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Which part of a payment counts as death in service?

HMRC’s first technical note gives the working rule. If a member’s death triggers three times salary because of their employment plus a refund of their contributions, only the three times salary is the death in service benefit. The refund would have been paid in other circumstances, so it is not excluded. The type of authorised payment and the trustees’ discretion over how it is paid do not change whether it qualifies, so a death in service benefit paid as a pension can still be excluded.

Technical note 2 works through a case. Mark dies at 62 with two money purchase pensions. His current employer’s scheme holds a pot of £200,000 and pays a death in service benefit of 2.5 times his £65,000 salary. His other scheme, unrelated to his job, holds £75,000 plus an extra £25,000 lump sum because he died before retirement age. His notional pension property is £300,000: the £200,000 pot and the full £100,000 from the second scheme. The death in service multiple is left out.

What about sick leave, career breaks, redundancy and old jobs?

The member must be employed, or in other work of a particular description, immediately before death. HMRC says it is for employers, scheme sponsors and schemes to decide under their own rules whether members on career breaks, long term sickness absence or supported redundancy periods meet that condition. A person who has left under a redundancy package may still be treated as employed if the package or scheme rules provide for it. Benefits from schemes for previous jobs, where the deceased was a deferred member, do not qualify, and lump sums payable on the death of a deferred member will not normally be excluded (Technical note 2).

Is death in service cover outside a pension scheme treated the same way?

Many employers provide cover through an excepted group life policy instead. That is a discretionary trust set up by the employer, not a registered pension scheme, so the payment has never been part of the employee’s estate. The trust is relevant property, but because the policy usually has little value until a death, exit charges on payments made within the first ten years are likely to be at 0% (IHTM17091, IHTM17092). The 2027 changes do not touch these trusts. The consultation response explains that the government excluded registered scheme death in service benefits so that employers would have no reason to move cover into such trusts. For small companies, relevant life policies are another route.

Does income tax apply to the payment?

Separately from inheritance tax, GOV.UK explains that most lump sums paid on the death of a member under 75 are tax free unless they exceed the deceased’s lump sum and death benefit allowance, or are paid more than two years after the provider is told of the death. Where the member was 75 or over, the provider deducts income tax. If lump sums exceed the allowance, the personal representatives must tell HMRC within 13 months of the death or 30 days after realising tax is owed, whichever is later. See the lump sum and death benefit allowance and tax on inherited pensions.

What will executors need to report?

Pension schemes must tell personal representatives about excluded benefits on request, including the amount of any death in service payment to each beneficiary, so the IHT400 can show why it has been left out (Technical note 2). HMRC also expects scheme administrators to report death in service payments to HMRC (Technical note 1). Excluded benefits are not caught by a withholding notice, so schemes can pay them promptly. The wider reporting process is covered in pensions and inheritance tax.

What does a worked example look like?

Illustration only. Priya dies in June 2027, aged 50 and still employed. Her employer’s money purchase scheme holds a pot of £150,000 and pays a death in service benefit of four times her £60,000 salary, £240,000. She also has a deferred pot of £80,000 from a previous job. Her notional pension property is £230,000, the two pots, and that is added to the rest of her estate. The £240,000 is an excluded benefit and adds nothing to the inheritance tax calculation, whoever the trustees pay it to.

What are the common mistakes?

Leaving out the whole payment from a scheme because part of it was death in service.
Treating a lump sum from a former employer’s scheme as death in service.
Applying the 2027 rules to a death before 6 April 2027, or the old rules to a later one.
Forgetting that a non discretionary public sector benefit is still in the estate for deaths before 6 April 2027.
Not asking the scheme for excluded benefit details needed for the IHT400.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.