Taxpayers face a "horrible process" with a pile of new admin to complete as a new tax takes force on pensions. A former DWP minister said people could face extra charges as a 40 per cent tax expands to include people's hard-earned retirement funds.
From April 2027, Labour will expand the remit of inheritance tax, with the tax to apply to unused pensions and pension death benefits. The sweeping shift will create a mountain of new admin for taxpayers, with grieving relatives risking substantial interest penalties due to bureaucratic delays outside of their control.
Ex-minister warns of 'awful' experience
Ex-DWP minister Steven Webb told the BBC's Money Box show of the new tax: "I think it's going to be awful, to be honest."
Personal representatives must settle any inheritance tax liability within six months of a person's death. Beyond that half-year deadline, HMRC applies an interest rate of 7.75 per cent to the outstanding debt—a charge that can rapidly snowball as inheritance tax bills can be for five-figure tax bills.
A lot of extra work
Mr Webb explained the extra responsibilities that the new tax on pensions will mean for personal representatives dealing with a person's estate. He said: "They've now got to find out details of every pension that the deceased was a member of. So, they've got to find the paperwork, contact all of them, ask the right questions, get the information back, and only when they've heard back from the worst-administered pension scheme—and we all know some appallingly administered pension schemes—only when they've heard back from the worst one, then they gather the information, work out the tax due, then tell the pension schemes how much tax to pay."
He warned it will "take ages" to gather these details. Mr Webb said: "People trying to do their best, to do their civic duty, are going to be caught in the middle of this horrible process."
Don't assume the new tax won't apply to you
The policy is primarily intended to target unused defined contribution pensions. But Mr Webb pointed out that salary-related schemes could also trigger tax liabilities. He said: "The main focus is what are called defined contribution pensions.
But there are cases where, for example, a death-in-service lump sum in certain cases will carry tax, or a payment you get if someone retired and didn't draw their pension for long. So, you can't assume that traditional pensions aren't in the net."
'Every pension scheme'
The former minister warned that your average person may well struggle to fill in all the forms. Mr Webb said: "You have to find out about everything first, and the rules are very complex.
And that's the problem—people aren't pension experts, so they've got to contact every pension scheme to give them the information, both how much money is involved and who's going to get it."
He said that people dealing with a deceased loved one's affairs will be like "amateur private detectives" trying to get all the details together.
HMRC response
HMRC was asked to response to the concerns. A technical note from the group published in August 2026 said it would be speaking with stakeholders about the new levy. More information is set to come out from HMRC this autumn about the expanded tax relating to:
- International issues
- How inheritance tax interacts with income tax
- More guidance on intestacy
- Clarifications around charities and trusts.
An HMRC spokesperson said previously: "More than 90 per cent of estates will still pay no inheritance tax, including on pension funds. We want to help people get their tax right and we're continuing to provide information about how the taxation of unused pension funds and death benefits will work.
We've published detailed notes to provide further clarity, and will publish further guidance ahead of the changes coming into effect."
