Income tax on an inherited pension depends mainly on how old the pension owner was when they died. If they died before 75, most lump sums and drawdown income from a defined contribution pot are tax free, provided the money is paid or designated within two years and lump sums stay within their lump sum and death benefit allowance. If they died at 75 or over, everything you take is taxed as your own pension income at your marginal rate.
Why does the age of 75 decide the tax?
The Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), sections 637H to 637N for lump sums and section 579CZA for beneficiaries’ drawdown, makes most death benefits tax free where the member died under 75 and taxable where they died at 75 or over. GOV.UK guidance on tax on a private pension you inherit summarises the result:
| Payment | Owner died under 75 | Owner died 75 or over |
|---|---|---|
| Most lump sums (defined contribution or defined benefit) | No tax, unless above the owner’s lump sum and death benefit allowance | Income tax deducted by the provider |
| Annuity or money from a new drawdown fund (set up from 6 April 2015) | No tax | Income tax deducted by the provider |
| Money from an old capped drawdown fund | Income tax deducted | Income tax deducted |
| Trivial commutation lump sums | Income tax deducted | Income tax deducted |
| Pension provided by the scheme, such as a dependant’s pension | Income tax deducted | Income tax deducted |
The last row catches many people out. A spouse’s pension from a defined benefit scheme is taxable whatever age the member died at. GOV.UK adds that such pensions can usually only go to a dependant, for example a spouse, civil partner or child under 23.
What if the owner died before 75?
Two conditions keep lump sums tax free. First, HMRC’s Pensions Tax Manual at PTM073200 says an uncrystallised funds lump sum death benefit is tax free only if it is paid within two years of the date the scheme administrator first knew of the death, or could reasonably have been expected to know of it. Paid later, the whole lump sum is taxable.
Second, lump sums from funds that had not previously been crystallised are tested against the deceased’s available lump sum and death benefit allowance (LSDBA), not the beneficiary’s. PTM073010 says the standard LSDBA is £1,073,100 unless the member had protection. Tax free lump sums the member took during their life, and other death benefits already paid, reduce what is left. Any excess is taxed at the recipient’s marginal rate.
For drawdown, PTM072430 explains that a dependant’s or nominee’s income withdrawal is tax free if the member died under 75 and any of the member’s unused uncrystallised funds were designated into the beneficiary’s flexi access drawdown fund within the same two year window. Unused funds already in the member’s own drawdown fund had been crystallised during their lifetime, so they are not tested against the LSDBA. HMRC’s example of Isha in PTM073010 shows a £200,000 drawdown fund passing outside the allowance, while £26,900 of a £1,000,000 uncrystallised funds lump sum exceeded her remaining allowance and was taxed at the recipient’s marginal rate.
What if the owner died at 75 or over?
PTM073010 explains that taxable lump sum death benefits paid to an individual are pension income of the recipient. HMRC’s guidance for scheme administrators says tax is deducted using the emergency tax code if paid directly to an individual, so too much is often withheld on a large lump sum. Drawdown income or annuity payments are also taxed at the beneficiary’s marginal rate under PAYE.
If the lump sum goes to a “non qualifying person”, such as a company, trustees (other than bare trustees) or personal representatives acting as such, the special lump sum death benefits charge applies instead at 45% under section 206 of the Finance Act 2004. The recipient cannot reclaim this. Where a trust later pays the money to an individual beneficiary, that beneficiary is taxed on the gross amount but can set off the proportion of the 45% charge relating to their share.
Because drawdown lets you choose how much to take each year, a beneficiary of someone who died at 75 or over can often pay less tax by keeping the fund in drawdown and spreading withdrawals across tax years, rather than taking a lump sum that pushes their income into the higher or additional rate.
Can you pass an inherited pot on again?
Yes. GOV.UK guidance says that if you inherit a defined contribution pot you can nominate someone to receive what you have not used, but the money must be in a flexi access drawdown fund when you die. PTM072430 explains that the successor’s income is then tax free if you die before 75 and taxable if you die at 75 or over. Your age at death, not the original owner’s, is what counts at that stage.
Who has to report what to HMRC?
Where the owner died under 75 and lump sum death benefits exceed their LSDBA, the person dealing with the estate must tell HMRC within 13 months of the death or 30 days after realising tax is owed, whichever is later. HMRC then sends the beneficiary a notice of the tax due. The same deadline applies for telling the pension provider when a lump sum paid more than two years after notification is taxable. The deceased’s own final tax position is a separate exercise, covered in our guide to tax returns for someone who has died.
How do you get back tax that was over deducted?
If you file Self Assessment, the refund comes through your return. Otherwise GOV.UK lists death benefit versions of the usual claim forms: P50Z(DB) if the payment used up the pot and you have stopped working, P53Z(DB) if it used up the pot and you have other income, and P55(DB) for a payment that did not empty the pot where you are not taking regular payments.
What changes from 6 April 2027?
For deaths on or after 6 April 2027, Finance Act 2026 brings most unused pension funds into the estate for inheritance tax. Where the owner died at 75 or over, a payment could then bear both inheritance tax and income tax. Section 70 of Finance Act 2026 inserts section 567B into ITEPA 2003, allowing a deduction from taxable pension income for inheritance tax paid that is attributable to the pension. Our guide to pensions and inheritance tax covers the inheritance tax side in detail.
A worked example
Illustration only. Two sisters each inherit a £100,000 defined contribution pot that had never been touched, with no other death benefits paid.
- Ana’s father died aged 72. The scheme pays her a £100,000 lump sum 10 months after it learned of his death. It is within his LSDBA and within two years, so it is tax free.
- Beth’s mother died aged 78. Beth earns £40,000. A £100,000 lump sum would be added to her income in one year, taxed at 40% and 45%, and her personal allowance would be lost entirely because her income would exceed £125,140 (see personal allowance tapering). Taking £10,000 a year from beneficiary’s drawdown instead would keep her within the basic rate band each year.
Common mistakes are missing the two year window, assuming the beneficiary’s own allowance is used, and taking a lump sum from the pension of someone who died after 75 without comparing it with drawdown.
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Sources
- GOV.UK: Tax on pension death benefits
- GOV.UK: Manual page PTM073010
- GOV.UK: Manual page PTM072430
- GOV.UK: Manual page PTM073200
- GOV.UK: Pension administrators lump sum death benefit payments
- GOV.UK: Claim a tax refund on your pension by post
- legislation.gov.uk: Act 2026 c. 11, section 71
- legislation.gov.uk: Act 2026 c. 11, section 70
- GOV.UK: Income tax rates
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.