Is death in service subject to inheritance tax?

No. Benefits payable through a registered scheme because you died while employed are specifically excluded from the pension rules taking effect on 6 April 2027, from discretionary and non-discretionary schemes alike.

What death in service actually is

It is life cover provided by your employer, usually as a multiple of salary, paid if you die while working for them. It is one of the most valuable things an employer provides, and one of the least understood.

It ends the day your employment does. People who leave, retire or are made redundant frequently discover they have no life cover at all, having assumed for years that they were covered.

What to check on yours

The multiple
Commonly a number of times basic salary. Whether bonus and other pay count varies between schemes.
Who it would be paid to
There is usually a nomination form, separate from any pension expression of wish. It is the form most often left blank or out of date.
Whether it is enough
Cover set against salary is not the same as cover set against what your household would need. The gap is usually the mortgage.
What happens if you leave
It stops. If your own cover was arranged around it, that arrangement stops working on the same day.

The exclusion applies where you were in employment immediately before death. Somebody who had already left is not obviously covered by it.

Related questions

Is the payout taxed as income?

Usually, though not always. A lump sum from a registered scheme is tested against the member's remaining lump sum and death benefit allowance, and anything above it is taxed at the recipient's marginal rate. Two further conditions apply: the member has to have died under 75, and the money has to be paid within two years of the scheme learning of the death. A large multiple of a high salary is where this actually bites.

Does it form part of my estate?

Usually not, where the scheme pays at the trustees' discretion, and it is excluded from the April 2027 pension rules either way.

Do I still need my own life cover?

That depends on the size of the benefit and on what would still need paying. Employer cover also ends when the job does, so a plan built only on it has a gap at every job change.

What is a relevant life policy?

It is individual death in service cover a company pays for, often used by small companies and directors who have no group scheme. The tax treatment depends on the purpose, ownership and structure of the policy.

Where this fits

Employer cover is the piece of a household's protection nobody has read. We will tell you what yours actually says.

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The advisers for this subject

Sunny Bharj

Sunny Bharj

Independent Financial Adviser

Tony Springer

Tony Springer

Independent Financial Adviser

Advising through Equity & General Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority. Check the firm on the FCA register under number 474163.

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A first conversation of about twenty minutes, at no cost to you. Tell us what is on your mind: a pension you have lost track of, a fixed rate ending, a will you keep meaning to write.