Policy paper

Income Tax: collecting tax on excess lump sum death benefits

Published 28 October 2026

Who is likely to be affected 

This measure is expected to impact a small number of beneficiaries who have received payment of a pension lump sum death benefit where the deceased member’s available lump sum and death benefit allowance has been exceeded.  

This measure is also expected to affect a small number of individuals with fixed protection, individual protection or primary protection whose available lump sum and death benefit allowance is calculated using certain disregard provisions. 

General description of the measure 

This measure will change how tax is charged on certain pension lump sum death benefits paid above the deceased member’s available lump sum and death benefit allowance.

These amounts will no longer be treated as pension income. Instead, HMRC will calculate and collect a separate tax charge at the recipient’s marginal rate of Income Tax. 

Recipients will still pay tax at the rate that reflects their wider income, but the excess lump sum will not be added to that income. This will avoid reopening their wider tax and income-related benefits position, potentially several years after the payment was received. 

The change will provide HMRC with a practical standalone process for assessing and collecting the tax due, enabling affected cases to be resolved more efficiently. 

Consequential changes will also be made to Income Tax rules to preserve Inheritance Tax (IHT) relief where the same benefit is also subject to an IHT charge. 

The measure will also make technical amendments to the lump sum and death benefit allowance regime to ensure that the calculation of certain disregards operate as intended. 

Policy objective

The objective of this measure is to provide a simpler and more certain tax treatment for affected recipients. It will preserve the policy of taxing relevant lump sum death benefits above the available allowance at the recipient’s marginal rate, while making sure that the charge can be applied without reopening their wider tax and income-related benefits position after the tax year has ended. 

The measure will also align the tax treatment with the way these payments are reported, assessed and collected, reducing unnecessary complexity and giving recipients a clearer route to settle the tax due. 

The measure will also make sure that certain lump sum and death benefit allowance disregard provisions continue to operate as intended following the abolition of the lifetime allowance, providing certainty for affected individuals and pension scheme administrators. 

Background to the measure 

The lifetime allowance charge was removed from 6 April 2023 and the lifetime allowance was abolished from 6 April 2024. As part of those reforms, certain lump sum death benefits paid above the available lump sum and death benefit allowance became taxable as pension income at the recipient’s marginal rate. 

These payments are made before it is known whether the allowance has been exceeded. Information from all relevant pension schemes must first be brought together by the deceased member’s personal representatives and reported to HMRC. As a result, the recipient’s tax liability may not be established until several years after the payment was made. 

The current legislation excludes the direct tax charge from Self-Assessment and provides for HMRC to make a separate assessment. However, treating the excess payment as pension income can also require the recipient’s wider tax and income-related benefits position for the year of payment to be revisited. This has created administrative difficulties and delayed the resolution of affected cases. 

In addition, following the abolition of the lifetime allowance, legislation was introduced to disregard certain crystallisation amounts when calculating an individual’s available lump sum and death benefit allowance. Subsequent review identified a technical issue affecting the operation of those disregard provisions in relation to those with lifetime allowance protections, which this measure seeks to address. 

Detailed proposal 

Operative date

The measure will have retrospective effect for relevant lump sum death benefits paid on or after 6 April 2024. Transitional provisions will apply the same approach to relevant payments made in the 2023 to 2024 tax year. 

Consequential changes concerning the interaction with IHT will have effect from 6 April 2027. 

Current law  

Current law for the taxation of relevant lump sum death benefits is contained in Part 9, Chapter 15A of the Income Tax (Earnings and Pensions) Act 2003, in particular sections 637H to 637M and section 637T. Section 579A of that Act contains the general charge to tax on pensions under registered pension schemes. 

The assessment and collection provisions are contained in regulations 4, 5 and 8 of the Registered Pension Schemes (Accounting and Assessment) Regulations 2005. Reporting obligations for scheme administrators and personal representatives are contained in regulations 8 and 10 of the Registered Pension Schemes (Provision of Information) Regulations 2006. 

Sections 567B and 579CB of the Income Tax (Earnings and Pensions) Act 2003 contain provisions concerning the interaction between Income Tax and Inheritance Tax for relevant pension benefits. Transitional provisions for lump sum death benefits paid in the 2023 to 2024 tax year are contained in sections 18 and 19 of the Finance (No. 2) Act 2023. 

Current law relating to the lump sum and death benefit allowance is contained in Schedule 9 to the Finance Act 2024. In particular, paragraphs 125 and 129 provide disregards for certain amounts previously tested under the former lifetime allowance regime in connection with BCE1 and age 75 tests respectively. 

Proposed revisions 

Legislation will be introduced in Finance Bill 2026 to create a new standalone charge to Income Tax on the chargeable amount of certain relevant lump sum death benefits. The persons and payments within scope will be specified in the legislation. The chargeable amount will continue to be determined by reference to the deceased member’s available lump sum and death benefit allowance, but an amount subject to the new charge will no longer be treated as pension income under Part 9 of the Income Tax (Earnings and Pensions) Act 2003. 

The rate of the charge will be calculated using a notional Income Tax calculation for the tax year in which the lump sum was paid. The chargeable amount will be added to the recipient’s income solely to determine the applicable rate or rates. Any available personal allowance will be taken into account, and different parts of the chargeable amount may be taxed at different rates where it spans more than one tax band. 

The chargeable amount will not form part of the recipient’s total income, net income, adjusted net income or any other income measure used to determine tax liabilities, repayments, allowances, benefits or entitlements. The existing standalone assessment and collection process will be retained, with amendments to the Registered Pension Schemes (Accounting and Assessment) Regulations 2005 to reflect the new charge. 

Consequential amendments will preserve the existing relief where the same benefit is subject to both IHT and Income Tax and will make sure that any subsequent refund of IHT brought into charge appropriately. 

Legislation will also make minor technical amendments to the calculation of certain lump sum and death benefit allowance disregards. These amendments will clarify how the disregard provisions apply following the abolition of the lifetime allowance and make sure that they operate consistently with the policy intent. 

Summary of impacts 

Exchequer impact (£million) 

2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030	2030 to 2031	2031 to 2032
Negligible	Negligible	Negligible	Negligible	Negligible	Negligible

This measure is expected to have a negligible impact on the Exchequer.  

Economic impact 

This measure is not expected to have any significant macroeconomic impacts. 

Impact on individuals, households and families 

This measure is expected to affect a small number of beneficiaries of pension lump sum death benefits where the deceased member’s available lump sum and death benefit allowance has been exceeded. Beneficiaries will continue to be notified by HMRC of the tax due and will not need to include the payment in Self-Assessment. The tax will be calculated at the recipient’s marginal rate through a standalone assessment, but the chargeable amount will not affect their wider tax calculation or income-related benefits and entitlements. 

The measure is also expected to affect a small number of individuals with lifetime allowance protection by making sure that certain lump sum and death benefit allowance disregard provisions operate consistently with the policy intent. 

The measure introduces no new or different responsibilities for the majority of individuals. 

The measure is not expected to have an impact on family formation, stability, or breakdown. This measure is expected overall to impact individuals’ experience of dealing with HMRC as the changes simplify the pension tax system and reduce their tax administration obligations. 

Equalities impacts 

This measure may apply to individuals regardless of their protected characteristics. HMRC does not currently hold data on the protected characteristics of individuals impacted by this measure and so cannot assess if there are any disproportionate impacts to protected groups. 

Administrative impact on business including civil society organisations 

This measure is expected to have no impact on businesses or civil society organisations as it only affects individuals.   

Operational impact (£million) (HMRC or other) 

This will require changes to HMRC’s operational guidance and processes so the new standalone charge can be calculated, assessed and collected. As HMRC already operates a standalone assessment process for these payments this measure is not expected to carry any additional cost. 

Other impacts 

Other impacts have been considered and none have been identified. 

Monitoring and evaluation 

The measure will be kept under review through HMRC’s administration of the standalone charge and engagement with pension scheme administrators, pension scheme managers and affected recipients. 

Further advice 

If you have any questions about this change, contact the Pension Policy Team by email policypensions@hmrc.gov.uk.