You may have to pay tax on payments you get from someone else’s private pension after they die.
Private pensions include workplace pensions and personal or stakeholder pensions.
The way you’re taxed depends on whether you get payments as a pension or a lump sum. If you get some of the money as a pension and some as a lump sum, the payments are taxed separately.
You can’t choose how you’re paid - this depends on the rules of the pension scheme.
If you’re paid a pension
You pay Income Tax on regular pension payments from the pension of a person who died.
The tax is deducted before you’re paid. How much Income Tax you pay depends on the tax rate that applies to you.
If you’re paid a lump sum
You don’t pay tax on a lump sum from the pension of a person who died (sometimes called a ‘death in service’ benefit) unless you’re in one of these situations.
When the pension provider deducts Income Tax
The pension provider deducts Income Tax at a rate of 55% before it pays you the lump sum if the person who died:
- had already started getting their pension
- was over 75
When you pay Income Tax yourself
If the pension provider didn’t deduct Income Tax, you’re responsible for paying Income Tax at a rate of 55% on:
- any part of the lump sum above £1.25 million - this is because the person who died went above the lifetime allowance
- the whole lump sum if you’re paid more than 2 years after the pension provider was told that the person died
If the lump sum is above £1.25 million, the pension provider will tell HM Revenue and Customs (HMRC) that you owe Income Tax. You’ll get a bill from HMRC.
If you’re paid more than 2 years after the pension provider was told that the person died, you must fill in a Self Assessment tax return so HMRC can bill you for the tax. Use box 13 to declare the lump sum as an unauthorised payment in the ‘Pension savings tax charges’ section - you’ll need form SA101 if you’re using paper forms.
When you pay Inheritance Tax
You don’t usually pay Inheritance Tax on a lump sum because payment is usually ‘discretionary’ - this means the pension provider can choose whether to pay it to you.
Ask the pension provider if payment of the lump sum was discretionary. If it wasn’t, you may have to pay Inheritance Tax.