This article is for financial advisers only. It must not be distributed to, or relied on by, customers. The information on this page is based on our understanding of legislation as at 13 October 2026.
Headlines
- From 6 April 2027, most unused pension funds and death benefits will be included in a deceased member's estate for Inheritance Tax (IHT) purposes.
- Personal representatives (PRs) remain primarily responsible for reporting and paying IHT, but beneficiaries become jointly liable with the PR once benefits are vested.
- The Pensions direct payment scheme allows IHT to be paid directly from pension benefits to HMRC.
- Payment notices can be submitted by PRs or beneficiaries and must meet specific legislative conditions.
- Scheme administrators must pay IHT following receipt of a valid notice within 35 days or risk becoming jointly liable for the unpaid tax.
- The direct payment mechanism can simplify estate administration and help avoid cashflow challenges where the pension beneficiaries and estate beneficiaries are different people.
- Paying IHT through the scheme can also help ensure the correct interaction between IHT and income tax on pension death benefits.
Most unused pension funds and death benefits will form part of a person's estate for Inheritance Tax (IHT) purposes when the person dies on or after 6 April 2027. This means PRs or prospective personal representatives (PPRs) will need to consider pension wealth when valuing an estate, reporting to HMRC and arranging payment of any IHT due.
Recognising that pension benefits are often paid directly to beneficiaries rather than through the estate, the government has introduced a new mechanism allowing IHT attributable to pension benefits to be paid directly from pension funds before they are distributed. This is known as the Pensions direct payment scheme.
The Pensions direct payment scheme allows a pension scheme administrator to pay IHT directly to HMRC from pension benefits on receipt of a valid payment notice.
The scheme is designed to solve a practical problem. Although PRs are primarily responsible for reporting and paying IHT on pension assets, those assets will typically remain within the pension scheme and may be paid to different beneficiaries from those inheriting the rest of the estate. Without a direct payment mechanism, PRs may have to use estate assets to settle tax attributable to pension benefits and then seek reimbursement from pension beneficiaries.
The direct payment scheme enables the tax to be settled from the pension arrangements themselves before benefits are paid.
In some cases, the PRs or PPRs may be concerned that pension benefits will be paid before the IHT position is known. To address this, the legislation also introduces the option for PRs or PPRs to instruct the scheme administrator to withhold up to 50% of the beneficiaries’ entitlement under the scheme for a period of up to 15 months following the end of the month the member dies in. It is intended to protect funds that may be required to meet an IHT liability.
If a withholding notice is already in place, the scheme administrator can use the withheld funds to satisfy a subsequent payment notice. You can read more about withholding and withholding notices in HMRCs technical notes – see Further Information at the end of this article.
A payment notice can be given by:
- the deceased member's PRs; or
- a pension beneficiary who is liable for IHT attributable to the pension benefits they will receive.
A trustee of a trust beneficiary can also give a notice in relation to that trust's liability. However, while PPRs can issue a withholding notice, they can’t submit a payment notice until they are formally acting as the PR.
Use of the direct payment scheme is entirely optional. Beneficiaries can still choose to pay the IHT themselves from personal funds or from benefits they have already received.
Once the PRs have established that IHT is due and the amount attributable to the pension benefits has been calculated, either the PRs or the beneficiary can give the scheme administrator a payment notice.
The notice instructs the scheme administrator to pay a specified amount of IHT (and interest) directly to HMRC. The amount paid reduces the pension benefits that would otherwise be payable to the beneficiary.
Where a valid notice is received, the scheme administrator must make the payment within 35 days. Failure to do so can make the scheme administrator jointly liable for the amount that should have been paid.
A payment notice is the formal instruction that allows a scheme administrator to pay IHT directly to HMRC under the Pensions direct payment scheme.
To be valid, a payment notice must contain the information prescribed by HMRC. The information that HMRC intends to prescribe is set out in the draft notice in Annex C HMRC’s Technical note 2, published on 27August 2026. HMRC confirmed in the same note that scheme administrators may develop their own template, or incorporate the requirements into existing processes, but the notice must still contain the information set out in their draft template as a minimum.
Scheme administrators are expected to verify that these conditions are met before making a payment. If they are not satisfied, the notice must be rejected and the taxpayer informed why it is invalid (see section below on invalid notices).
The notice must:
- specify the exact amount of tax and interest to be paid;
- be for at least £1,000;
- relate to IHT attributable to the deceased's pension benefits under that scheme;
- not exceed the taxpayer's liability; and
- not exceed the value of benefits still available to satisfy the liability.
HMRC's draft payment notice template says the following information will need to be included:
Details of the deceased member
- full name;
- date of birth and date of death;
- National Insurance number (where applicable/known);
- pension scheme reference details; and
- HMRC IHT reference number.
Details of the person giving the notice
The notice must make clear whether it is being given by:
- the PR; or
- a beneficiary (including a trustee beneficiary).
The individual giving the notice will normally need to provide their name, address and contact details.
If there are multiple PRs who must act jointly, this information must be given for each of them.
Where the notice is given by a beneficiary
The beneficiary will be expected to provide the full name, address, phone number and email address for each PR.
If a company is acting on behalf of the PRs , then their contact details should be supplied.
Where the notice is completed by the PR
Where the PR is completing the notice, they should provide the following details for each beneficiary:
- their full name, and
- their share of the total IHT and interest they’ve instructed the scheme administrator to pay.
Amount to be paid
The notice must specify the exact amount of:
- IHT, and
- any interest
that the scheme administrator is being asked to pay to HMRC. The amount cannot simply be described as "the IHT due" or "whatever amount HMRC calculates”.
Declaration by the taxpayer
HMRC's draft template also includes a declaration requiring the taxpayer to confirm that:
- the information provided is correct to the best of their knowledge and belief; and
- they understand that the scheme administrator will reduce pension benefits to reflect any tax paid to HMRC.
This declaration is important because payment of the tax will directly reduce the benefits that would otherwise be payable to beneficiaries.
Scheme administrators are not expected to recalculate the IHT liability. HMRC has confirmed they can generally rely on the IHT calculation provided by the PR or the beneficiary. However, they should perform some reasonableness checks before making payment. For example, where a PR wishes to make a payment before HMRC has confirmed the final liability, the amount requested should appear reasonable and the administrator should check that the tax element does not exceed 40% of the notional pension property.
They must also confirm that sufficient unpaid benefits remain in the scheme to support the payment. A notice will not be valid if the relevant funds have already been paid or are no longer available, for example because they have been used to purchase an annuity.
Where a beneficiary submits the notice, the amount cannot exceed the value of their remaining unpaid benefits. Where the PR submit the notice, the amount cannot exceed the value of benefits still available under the scheme after taking account of payments already made or covered by earlier notice.
Where a notice doesn't meet the prescribed conditions, the pension scheme administrator must not make the payment. They should explain the reason for rejection, allowing the taxpayer to submit a revised notice if appropriate. Common reasons could include:
- missing information;
- insufficient evidence of authority to act;
- an amount below the £1,000 minimum;
- requesting payment of more than the unpaid benefits available; or
- requesting payment of more tax than the individual is liable for.
This process is intended to balance flexibility with protection for both beneficiaries and scheme administrators, ensuring that pension funds are only used to settle genuine IHT liabilities and that any reduction in benefits can be traced back to a valid taxpayer instruction.
The way the scheme administrator adjusts benefits depends on who submitted the payment notice:
- Beneficiary payment notices - where the beneficiary gives the notice, the amount paid to HMRC is deducted from that beneficiary's own entitlement.
- PR payment notices - where the PR submits the notice, the scheme administrator must make a "just and reasonable" adjustment to benefits. In practice, this means the tax should be borne by the beneficiaries whose benefits gave rise to the IHT liability.
It would not be reasonable to deduct tax from:
- excluded benefits, such as dependants' scheme pensions; or
- benefits payable to exempt beneficiaries, such as surviving spouses or civil partners.
One of the other benefits of the direct payment scheme is that it helps prevent double taxation.
Where pension death benefits are subject to both IHT and income tax, legislation provides relief so that the amount used to satisfy the IHT liability is not also taxed as pension income.
When a payment notice is used, the IHT is deducted before the benefits are paid. This means any subsequent income tax is generally applied only to the reduced benefit amount, helping beneficiaries achieve the correct overall tax outcome.
Example
George dies aged 78 on 1 June 2027. Once his estate and notional pension property have been valued, his PR calculated that IHT of £100,000 is due on his estate. £10,000 of that is due on his notional pension property which is valued at £80,000. The scheme administrator completes their investigation and decides that his niece Angela will be the sole beneficiary of the pension death benefits on 1 September 2027. Angela is a basic rate taxpayer.
Using the direct payment system | Angela pays the IHT from her own money |
|---|---|
Notional pension property = £80,000 IHT paid from pension = £10,000 Balance = £70,000 Angela takes the benefits as a death benefit lump sum which is taxable at her marginal rate of tax i.e. 20% Income tax deducted = £14,000 Lump sum paid = £56,000 Total tax paid = £24,000
| Notional pension property = £80,000 Angela pays the £10,000 IHT from her own resources. She takes the benefits as a death benefit lump sum which is taxable at her marginal rate of tax i.e. 20% Income tax deducted = £16,000 Lump sum paid = £64,000
Total tax paid = £26,000.
Angela has paid £2,000 more in tax this way. She will need to resolve the overpayment directly with HMRC. |
Although Angela will end up in the same position regardless of whether she uses the direct payment system or not, using it means she doesn’t have to contact HMRC to claim back the overpayment that results from paying IHT and income tax on the same funds.
The information-sharing regulations introduced alongside the new IHT regime require scheme administrators to provide confirmation whenever a direct payment is made.
Where a scheme administrator pays IHT following a payment notice, they must provide details to the relevant beneficiary or PR, including:
- the amount of IHT paid;
- any interest paid;
- the HMRC payment reference;
- the date of payment; and
- confirmation that benefits have been reduced accordingly.
The information generally must be supplied within 14 days of the payment being made.
You can see more in our summary of the information sharing framework.
HMRCs technical note 2 sets out how they envisage this working in examples 11-13. The examples cover the following scenarios:
- Example 11 - a single beneficiary who is also the PR submits a valid payment notice,
- Example 12 - what happens when a scheme administrator fails to comply with a valid notice within the 35-day timescale,
- Example 13 - the scheme administrator refuses a payment notice because it’s not valid.