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The 67% pension death-tax trap explained (2027)
A post-75 pension can meet inheritance tax and then income tax on what is left. Stack the two and the headline effective rate reaches about 64% or 67% — here is exactly how, and what stops it going higher.
Based on Finance Act 2026, HMRC’s May 2026 “Inheritance Tax on pensions” technical note, the ADR-055 ratification pack, and technical guides from M&G and Royal London.
6 min read · Last reviewed
— In short
The “67% trap” is shorthand for two taxes meeting on a post-75 inherited pension from 6 April 2027: 40% inheritance tax on the fund, then income tax on the roughly 60% that remains. A higher-rate beneficiary reaches about 64% combined; an additional-rate beneficiary about 67%. The two taxes never fall on the same slice — an enacted offset removes the inheritance-tax-equivalent portion from taxable pension income.
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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 (PTM173000). 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.
- 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%
These are rate mechanics, not a specific client’s bill. The exact figure 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. The offset is exactly what keeps the combined rate at about 64%/67% rather than higher.
The statutory arithmetic is enacted and not provisional. What is still pending is HMRC’s claim, process and timing guidance and the information-sharing implementation. 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) · PTM173000 (income tax on death benefits) · HMRC “Inheritance Tax on pensions” technical note §§8.1–8.2 · ADR-055 ratification pack
Common questions
- What is the 67% inheritance tax trap on pensions?
- It describes two taxes meeting on a post-75 inherited pension from 6 April 2027: 40% inheritance tax on the fund, then income tax on the residue when a beneficiary draws it. For an additional-rate beneficiary that combines to about 67%; for a higher-rate beneficiary, about 64%.
- What is the effective tax rate on an inherited pension after 2027?
- It depends on the beneficiary’s marginal rate and whether inheritance tax applies. After a post-75 death charged at 40% inheritance tax, the roughly 60% residue is taxed as income: about 64% combined at the higher rate and 67% at the additional rate. A pre-75 death is generally income-tax-free, so the effective rate is lower.
Sources & grounding
Two taxes on a post-75 death from 6 April 2027: Finance Act 2026 brings most unused pension funds into the estate for inheritance tax, and the existing income-tax treatment of death benefits (taxable as the beneficiary’s income where the member died at or after 75) is not repealed. HMRC technical note §§8.1–8.2. https://www.gov.uk/government/publications/inheritance-tax-on-pensions-technical-note/technical-note-inheritance-tax-on-pensions · https://www.legislation.gov.uk/ukpga/2026/11/contents/enacted
Primary sources:https://www.gov.uk/government/publications/inheritance-tax-on-pensions-technical-note/technical-note-inheritance-tax-on-pensionshttps://www.legislation.gov.uk/ukpga/2026/11/contents/enacted
Combined-rate arithmetic (ratified reading): a fully 40%-inheritance-tax-charged fund leaves a 60% residue; income tax on that residue at the higher rate (40%) adds 24 percentage points for a 64% combined rate, and at the additional rate (45%) adds 27 points for 67%. Source: ADR-055 ratification pack (Pack C corrects an earlier “~52%” note to 64%; the 67% variant is the additional-rate case). No new tax arithmetic is computed here.
The offset that stops the same slice being taxed twice: where inheritance tax is paid, the portion corresponding to that tax and interest does not count towards the beneficiary’s taxable pension income (scheme-direct s.226B net benefit, or the ITEPA 2003 s.567B deduction where the beneficiary or personal representatives bear it). The enacted arithmetic is not provisional; HMRC’s claim and process guidance is pending. Provider corroboration: M&G / Professional Paraplanner and Royal London. https://professionalparaplanner.co.uk/technicalzone/interaction-of-income-tax-and-iht-on-pensions-post-april-2027/ · https://adviser.royallondon.com/technical-central/pensions/death-benefits/inheritance-tax-on-pension-death-benefits-from-april-2027/
Primary sources:ITEPA 2003 s.567B deduction where the beneficiary or personal representatives bear it). Th
For planning and illustration purposes only. Verify all inputs against source documents. This explainer does not constitute financial or tax advice.