Is death in service benefit paid to my family taxed?

Full answer

Death in service benefit is a valuable but often overlooked employee benefit, and how it is structured has a major effect on whether the payout is taxed and whether it counts towards Inheritance Tax. **What death in service benefit typically provides** Many employers offer death in service cover, usually as part of, or alongside, the workplace pension scheme, paying a lump sum (commonly two, three, or four times annual salary, though this varies by employer) to nominated beneficiaries if the employee dies while still employed, before drawing their pension. **Why it is normally paid free of Income Tax and Inheritance Tax** Death in service schemes are typically structured under a discretionary trust arrangement, where the scheme trustees (not the deceased's estate) decide who receives the payout, guided by (but not strictly bound by) an "expression of wish" nomination form the employee completed while alive -- because the trustees exercise genuine discretion and the money never legally forms part of the deceased's estate, the payment normally falls outside Inheritance Tax entirely and is paid to beneficiaries free of Income Tax. **Worked example** An employee earning £50,000 a year has death in service cover of four times salary, giving a potential payout of £200,000. If they die while employed, the scheme trustees pay £200,000 to the nominated beneficiary (commonly a spouse, partner, or children) tax-free, and because the payment is made under trust rather than through the estate, it is not counted towards the deceased's estate for Inheritance Tax purposes, and no Income Tax is deducted from the payout. **Why the expression of wish form matters** Because trustees have discretion over who receives the payment, an up-to-date expression of wish form is important to guide them towards the employee's actual intended beneficiary -- while trustees are not strictly bound to follow it, in practice they normally do so unless there is a good reason not to (for example, if circumstances have clearly changed since the form was completed), so keeping this nomination current after major life events such as marriage, divorce, or having children is essential. **How it differs from ordinary life insurance bought personally** A personal life insurance policy bought and owned directly by the deceased (rather than through a discretionary employer scheme or written in trust) normally DOES form part of their estate on death, potentially increasing the Inheritance Tax bill -- this is why financial advisers often recommend writing personal life insurance policies "in trust" as well, to achieve the same Inheritance Tax outside-the-estate treatment that employer death in service schemes provide automatically. **Effect on pension death benefits generally** Death in service lump sums are often paid alongside, but are legally distinct from, any separate pension death benefits that might also be payable from the employee's workplace pension pot itself -- both can potentially be paid to the same beneficiaries, but they typically come from different parts of the overall benefits package and may have different nomination forms. **Practical tip** Check your expression of wish nomination for any workplace death in service benefit is up to date, especially after marriage, divorce, or having children, and consider writing any personal life insurance policies in trust as well, since this is what allows employer death in service payouts to avoid both Income Tax and Inheritance Tax in the first place.

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