Death in Service Benefit: IHT, Tax Position and Expression of Wishes 2026/27

What Is Death in Service Benefit?

Death in service benefit is an employer-provided life insurance payment made to nominated beneficiaries when an employee dies while employed by the company. It is typically expressed as a multiple of the employee's annual salary -- commonly two to four times salary, though some schemes offer more.

The benefit is a form of group life assurance arranged by the employer, with premiums paid by the employer as a business expense. The death in service payment is usually in addition to any payments due under the employee's personal or workplace pension scheme.

For many employees -- particularly those who are younger, healthy, or have limited personal life insurance -- the death in service benefit represents the largest single financial protection available to their family. Understanding its tax treatment is therefore important for financial planning.

The Trust Structure and IHT

The key to understanding the tax position of death in service benefits is the trust structure under which most schemes are written. The majority of employer-sponsored death in service schemes are established under a discretionary trust. This is a deliberate structural choice with significant tax consequences.

Because the scheme is held in trust (with the employer and scheme trustees as trustees), the benefits belong to the trust, not to the deceased employee. When an employee dies, the lump sum is paid from the scheme to the trust and then distributed to beneficiaries at the trustees' discretion.

The crucial result of this structure is that the death in service payment does not form part of the deceased's estate. Because it is not the employee's property at death, it cannot be subject to inheritance tax (IHT). The nil rate band (GBP325,000 in 2026/27) and the residence nil rate band (GBP175,000) do not need to be applied against it, and the 40% IHT rate does not erode the benefit.

This means a death in service benefit of GBP200,000 can pass to the deceased's family intact, even if the rest of the estate would exceed the IHT threshold.

Why This Matters for Larger Estates

For employees with significant assets, this IHT advantage is particularly valuable. If a senior executive has an estate of GBP1.5 million (above the GBP500,000 combined nil rate and residence nil rate threshold for individuals), every additional pound inside their estate is subject to 40% IHT. A death in service payment of GBP400,000 (four times a GBP100,000 salary) kept outside the estate saves GBP160,000 in IHT compared to an equivalent amount held personally.

Expression of Wishes

Because the trust structure gives the trustees discretion over who receives the payment, employees can and should complete an expression of wishes (also called a nomination form or beneficiary nomination). This document records who the employee wishes the trustees to pay the benefit to and in what proportions.

The expression of wishes is not legally binding. The trustees are not obliged to follow it, and in some circumstances -- for example, where the nominated person has died, has been convicted of a crime, or where the employee's personal circumstances have changed significantly since the form was completed -- the trustees may decide to pay the benefit differently.

However, in practice, trustees follow nominations in the vast majority of cases, provided the nominated person is an appropriate beneficiary (typically a spouse, civil partner, child, or financial dependant) and the circumstances are straightforward.

How to Complete an Expression of Wishes

Most employer pension or group life scheme administrators provide a standard form, accessible via the HR system or scheme website. You should:

• Name specific individuals (not organisations or charities, unless the scheme allows it)
• State the proportions you wish each person to receive
• Update the form whenever your personal circumstances change materially

When to Update Your Expression of Wishes

Many employees complete the form when they join a scheme and never update it. This can lead to payments going to an ex-spouse after a divorce, or missing out a new partner entirely. Life events that should trigger a review include:

• Marriage or entering a civil partnership
• Divorce or separation
• Birth or adoption of a child
• Death of a previously nominated beneficiary
• Significant change in financial dependants

There is no cost to updating the form and no tax consequence of doing so.

Income Tax on the Death Benefit Payment

The income tax treatment of the lump sum received by beneficiaries depends on the type of scheme and the age of the deceased.

Registered Pension Scheme (Death Before Age 75)

If the death in service benefit is provided through a registered pension scheme (which most workplace arrangements are), and the member dies before age 75, the lump sum paid to the nominated beneficiaries is generally free of income tax.

This applies whether the benefit is paid as:

• A lump sum to individuals
• A lump sum into a trust for dependants
• A continuing pension for a dependant

The lump sum must be within the lump sum and death benefit allowance, which from April 2024 is set at GBP1,073,100 (the former lifetime allowance figure). Amounts above this threshold are subject to income tax at the recipient's marginal rate.

For most employees, the death in service benefit will be well below this limit.

Registered Pension Scheme (Death After Age 75)

If the member dies on or after age 75, the position changes. Lump sum payments to beneficiaries are taxed as income of the recipient in the year they receive it. The benefit is not simply added to the deceased's estate -- it is income for the beneficiary, taxed at their marginal rate.

For a beneficiary who is themselves a higher rate taxpayer, this could result in 40% tax on the received sum. This is a significant consideration for older employees still in employment with substantial death in service benefits.

Non-Registered Excepted Group Life Schemes

Some employers, particularly where there are high-earning employees affected by pension lifetime allowance or tapered annual allowance issues, provide death benefits through excepted group life policies rather than registered pension schemes.

In these cases, the scheme sits outside the registered pension framework. The payment is typically still free of IHT (if properly structured under a discretionary trust) but the income tax position may differ. The key is the specific trust deed and policy wording.

Employees with large death in service benefits provided through excepted schemes should obtain specific advice from the scheme administrators about the income tax treatment.

The Proposed IHT Changes From April 2027

One of the most significant developments in this area is the government's proposed reform to bring unused pension funds within the IHT estate from April 2027. This was announced in the Autumn Budget 2024.

The current position -- that pension funds and death in service benefits within pension schemes pass outside the estate -- is proposed to change so that:

• Unused pension funds remaining at death will form part of the taxable estate for IHT purposes
• The pension scheme administrator will be responsible for paying IHT attributable to the pension funds before passing the net amount to beneficiaries

These reforms are being consulted on and the final details may change before implementation. However, if they proceed as proposed, the IHT advantage of pension-held death in service benefits will be significantly reduced.

What This Means in Practice

For an employee with a GBP200,000 death in service benefit within a registered pension scheme and an otherwise taxable estate of GBP600,000:

• Under current rules: Death benefit passes to family outside the estate, IHT applies only to the GBP600,000 estate.
• Under proposed 2027 rules: The GBP200,000 benefit may be added to the estate, increasing the IHT-exposed amount.

This is a significant planning consideration and is driving many individuals to review their overall IHT planning with advisers before April 2027.

Lump Sum vs Continuing Pension for Dependants

When an employee dies while an active member of a defined benefit (DB) pension scheme, the scheme may offer the nominee or family a choice between:

• A lump sum death benefit, typically two to four times pensionable salary
• A dependant's pension, continuing for the life of a surviving spouse or civil partner (and sometimes children)

The tax treatment differs:

• A lump sum paid before age 75 is generally income-tax-free (within the lump sum and death benefit allowance).
• A dependant's pension is taxable as income in the hands of the dependant, subject to income tax at their marginal rate. The personal allowance of GBP12,570 applies.

For a surviving spouse with limited other income, a dependant's pension up to GBP12,570 per year would be received with no income tax. Above this level, income tax applies in the normal way.

Employer's Premium and Corporation Tax

From the employer's perspective, premiums paid for group life assurance (providing death in service cover) are a allowable business expense for corporation tax purposes. The premiums are not a benefit in kind for the employee -- they do not appear on the P11D and are not subject to income tax or NI.

This makes death in service cover an extremely tax-efficient employee benefit: the employer gets tax relief on the premiums, the employee receives protection with no tax liability on the premium benefit, and the payout is generally free of both IHT and income tax.

Practical Recommendations

Complete and maintain your expression of wishes. Even though it is not binding, it is the single most effective way to ensure your wishes are considered. Review it at least every two years and after any major life event.

Check whether your scheme is registered or excepted. This affects the income tax treatment, particularly if you are over 75.

Understand the proposed 2027 IHT changes. If you have significant pension assets in addition to death in service cover, take advice on how the proposed reforms may affect your estate.

Consider additional personal life assurance. Death in service cover ceases when you leave employment. For those with dependants, maintaining personal life assurance in parallel provides ongoing coverage regardless of employment status.

Coordinate with your overall IHT planning. For those with larger estates, a comprehensive IHT plan should consider how death in service benefits interact with nil rate band usage, trusts, and other reliefs.

Summary

Death in service benefits written under discretionary trust are outside the estate and not subject to IHT -- a significant financial protection for families. Expression of wishes nominations guide trustees but are not binding. Lump sums from registered schemes on death before 75 are income tax-free within the lump sum and death benefit allowance of GBP1,073,100. Death after 75 results in income tax for recipients. The proposed April 2027 reforms may bring pension-held death benefits within the IHT estate, making early review of pension and life assurance planning important for those with larger estates.