What is the 67% inheritance tax trap on pensions?

It describes an illustration in which the post-75 pension bears 40% inheritance tax, the offset applies, and all the residue is taxed at 45%, giving 67% combined. Using 40% income tax instead gives 64%. Neither figure is a universal cap.

What is the effective tax rate on an inherited pension after 2027?

It depends on the estate, the beneficiary’s income and tax regime, the offset conditions and the payment-year rules. The 64% and 67% illustrations assume the whole residue is taxed at 40% or 45%; they do not account for Scottish rates or personal-allowance withdrawal. A qualifying pre-75 death benefit is generally income-tax-free, subject to the applicable timing and allowance rules.

Death benefits and IHT · The 2027 tax traps, worked

The 67% pension death-tax trap explained (2027)

A post-75 pension can meet inheritance tax and then income tax on what is left. The 64% and 67% examples assume particular rates; the enacted offset is not a cap on every beneficiary’s total tax.

4 min read · Last reviewed 23 Sept 2026

— In short

The “67% trap” assumes a post-75 pension bears 40% inheritance tax and the offset applies, leaving 60% subject to income tax. Taxing all that residue at 40% gives 64% combined; using 45% gives 67%. These are rate illustrations, not maximums: Scottish rates, allowance withdrawal and the payment-year rules can change the outcome.

Put the rule to work

Run the calculation

Use the Pension IHT calculator (April 2027) with your figures and see the working. Free, with no sign-up required.

Run the calculator

On this page

Calculators for this topic (2)

The phrase “67% trap” is doing a lot of work in the pension press. It captures a real effect that arrives for deaths on or after 6 April 2027: an unused pension left on a death at or after 75 can meet inheritance tax on the fund and then income tax on what remains. This guide sets out where the number comes from, what each rate assumes, and — importantly — why it is not two taxes on the same pound.

Two taxes, one pension

Finance Act 2026 brings most unused pension funds into the estate for inheritance tax. It does not repeal the existing rule that, where the member died at or after 75, a death benefit is taxable as the beneficiary’s income at their marginal rate (ITEPA 2003 ss.579A and 637H–637N; PTM073010). So on a post-75 death both can be in point: inheritance tax on the fund, then income tax when the beneficiary draws the remaining benefit.

Where 64% and 67% come from

Start with £100 of unused pension. Inheritance tax at 40% takes £40, leaving a 60% residue. When the beneficiary draws that residue it is taxed as their income. At the higher rate (40%) the income tax is 40% of the 60% residue — 24 more points — so the combined effective rate is about 64%. At the additional rate (45%) the income tax is 27 points, giving about 67% — the figure the headlines use.

The combined effective rate on a post-75 pension from 6 April 2027 — rate mechanics

Unused pension fund at death: 100%
Inheritance tax at 40%: −40%
Residue taxed as the beneficiary’s income: 60%
Higher-rate beneficiary (40% on the 60% residue): +24% → about 64%
Additional-rate beneficiary (45% on the 60% residue): +27% → about 67%

Both illustrations assume the offset applies and the whole remaining benefit is taxed at the single stated rate. They are not maximum tax rates. Scottish pension rates and the withdrawal of the personal allowance can change the outcome; check the rules for the actual payment year. The exact figure also turns on the estate’s nil-rate bands (a fund fully sheltered by the nil-rate band bears no inheritance tax) and on the beneficiary’s own income and marginal rate. A basic-rate beneficiary lands well below 64%; a fund inside the nil-rate band avoids the inheritance-tax leg entirely.

It is not double tax on the same slice

The headline can read as though 40% and then 40% both fall on the whole pot. They do not. The income tax applies to the residue after inheritance tax, because the enacted rules remove the inheritance-tax-equivalent portion from taxable pension income. Where the scheme pays the inheritance tax directly (IHTA 1984 s.226B), the benefit is reduced first and income tax is charged on the net amount; where the beneficiary or personal representatives bear it, ITEPA 2003 s.567B gives an income deduction for the tax and interest where its conditions are met. That deduction does not impose a 67% cap on the combined tax burden.

The statutory arithmetic is enacted and not provisional. What is still pending is HMRC’s further income-tax claim guidance; the information-sharing regulations were laid in July. HMRC’s August technical note confirms that distinction. The route-by-route mechanics — and why the offset depends on who pays — are set out in the post-75 double charge and the three payment routes.

See it on an estate

The estate-level inheritance-tax leg — including how a pension can also erode the residence nil-rate band through the £2m taper — is in the £2m RNRB taper and pensions, and the enacted scope is in pensions and inheritance tax from April 2027. Compare the estate with and without one provider pension value on the Pension IHT calculator; the post-75 income-tax leg is worked separately. For planning and illustration only; this guide states the rules and does not constitute financial, tax or estate-planning advice.

Finance Act 2026 · IHTA 1984 s.226B (scheme-direct net benefit) · ITEPA 2003 s.567B (beneficiary/PR income deduction) · PTM073010 (tax on lump sum death benefits) · HMRC “Inheritance Tax on pensions” technical note §§8.1–8.2

Put this to work.

Open the Pension IHT (April 2027) and enter your client's figures. Pension IHT (April 2027)

Create a free account for guided calculations, no card needed. Where a calculator offers a compliance annex PDF, the annex sets out the calculation and its HMRC references, with your firm’s name on every page. If you have edited a calculator here, those inputs stay in this browser for 15 minutes after you click below.

Create free account

Use made-up figures until your firm holds our DPA.

Common questions

What is the 67% inheritance tax trap on pensions?: It describes an illustration in which the post-75 pension bears 40% inheritance tax, the offset applies, and all the residue is taxed at 45%, giving 67% combined. Using 40% income tax instead gives 64%. Neither figure is a universal cap.
What is the effective tax rate on an inherited pension after 2027?: It depends on the estate, the beneficiary’s income and tax regime, the offset conditions and the payment-year rules. The 64% and 67% illustrations assume the whole residue is taxed at 40% or 45%; they do not account for Scottish rates or personal-allowance withdrawal. A qualifying pre-75 death benefit is generally income-tax-free, subject to the applicable timing and allowance rules.

Sources

Based on Finance Act 2026, HMRC’s May 2026 “Inheritance Tax on pensions” technical note, ITEPA 2003 ss.579A and 637H–637N, and technical guides from M&G and Royal London.

HMRC Pensions Tax Manual, PTM073010 — Death benefits: lump sums: tax on authorised lump sum death benefits paid on or after 6 April 2016 gov.uk
Income Tax (Earnings and Pensions) Act 2003, section 567B — Cases where inheritance tax is paid in respect of pension death benefit legislation.gov.uk
Inheritance Tax Act 1984, section 226B — Tax on notional pension property: direct payment by scheme administrator legislation.gov.uk
Income Tax (Earnings and Pensions) Act 2003, section 579A — Pensions legislation.gov.uk
Income Tax in Scotland gov.uk
Income Tax rates and Personal Allowances gov.uk
Technical note 2: Further information on Inheritance Tax and Pensions gov.uk
Technical note: Inheritance Tax on pensions gov.uk
Finance Act 2026 legislation.gov.uk

For planning and illustration purposes only. Verify all inputs against source documents. This explainer does not constitute financial or tax advice.