The Government has announced the removal of the two-year tax deadline on qualifying pension death benefits following concerns that bereaved families could face unexpected tax bills because of administrative delays in the Civil Service Pension Scheme.
The measure, announced in the Budget on 28 October 2026, applies to qualifying payments made on or after that date. Legislation will be introduced through Finance Bill 2026–27. The rule change does not itself settle delayed pension claims.
How the previous two-year rule worked
Under the previous rules, when a pension scheme member died before reaching 75, certain lump-sum death benefits could be paid without Income Tax if the scheme administrator paid within two years of first knowing, or reasonably being expected to know, of the death, and the relevant allowance conditions were met. Payments after the deadline could become taxable even if beneficiaries had no control over the delay.
For individual recipients, the late payment could be taxed as pension income. Certain payments to non-individual beneficiaries, such as trusts or estates, could face a special 45% charge.
Civil Service Pensions crisis prompted scrutiny
The change follows concern from Parliament’s Public Accounts Committee about delays in the Civil Service Pension Scheme, which is administered by Capita. The committee chair, Sir Geoffrey Clifton-Brown, wrote to the Government on 14 October warning that administrative delays risked exposing bereaved families to tax bills through no fault of their own.
On 28 October, the committee welcomed the Budget announcement while stressing that the removal of the tax deadline does not absolve Capita of its responsibility to process claims and make payments promptly.
Who benefits from the reform?
HMRC says the change covers qualifying lump-sum death benefits relating to members who died before age 75, provided sufficient lump sum and death benefit allowance remains. It also covers specified beneficiary annuities from drawdown funds and certain equivalent overseas pension arrangements. Payments made on or after 28 October 2026 can benefit even where the death occurred earlier.
The reform does not make all inherited pension payments tax-free. Other tax rules, including the treatment of deaths at age 75 or above, allowance limits and separate Inheritance Tax provisions, still apply.
Cost and impact
HMRC estimates the change will reduce Exchequer receipts by £5 million in 2026–27 and by £15 million annually from 2027–28 through 2031–32. The department expects fewer tax refund claims and less administrative work monitoring deadlines.
Outstanding problems
The Civil Service Pension Scheme has experienced significant delays since Capita took over administration in December 2025. The Government has acknowledged unacceptable service levels and has pursued recovery measures. Removing the tax consequence of the two-year deadline does not resolve delayed payments or compensate families for the time spent waiting.
The Public Accounts Committee says it will continue scrutinising the administration crisis. The tax reform is a separate legislative measure aimed at preventing otherwise qualifying death benefits from becoming taxable solely because payment is late.