Bereaved families will no longer be hit by an unexpected tax bill because of severe delays paying out civil service pensions, following a change in Wednesday's Budget.

Under previous HMRC rules, certain lump sum pension payments had to be paid within two years of the pension scheme being notified of a death to remain tax-free.

Campaigners had warned some families could face an unfair financial penalty because of delays which were not their fault.

The government has now changed the rules so payments will no longer become taxable solely because more than two years has passed.

The Civil Service Pension scheme manages the pensions of 1.7 million public sector workers in the UK.

Outsourcing firm Capita took over the administration of the scheme from a company called MyCSP in December 2025, saying it inherited a backlog of more than 86,000 cases.

Despite a two-year transition period to prepare for the takeover, problems have persisted and by February the backlog had grown to 120,000 cases.

Retired civil servants and bereaved families have been left waiting months for pension payments, with some struggling to pay bills.

According to the latest figures up to 30 September, 1,643 outstanding cases of bereavement or death in service are more than 100 days old.

The Cabinet Office, which has overall responsibility for the Civil Service Pension Scheme, previously said only a small number of these cases were approaching the two-year threshold.

However the PCS union, which represents civil servants, had warned there were "serious questions" over how long cases would remain unresolved.

Rob Wassell, 58, had to wait more than two years following the death of his brother until he finally received the lump sum from his civil service pension on Tuesday.

After his case was highlighted by the BBC last week, Rob says he got a call from the pension scheme's complaints department who told him the payment was on its way.

However, because it was made after two years it was taxed at 45%, amounting to thousands of pounds. If the payment was made after the rule change, it would not have been subject to tax.

Rob told the BBC he was pleased the government had addressed the issue in the Budget as this would mean others in his situation would not face a tax bill.

While he said he was happy to finally get his payment it was "a bitter pill to swallow" as he is now waiting for the outcome of a complaint review to find out if the tax will be reimbursed.

Rob said he was hopeful he would get the money back, adding: "I don't want to have to fight it anymore, it's been an ordeal already."

Pensions minister Torsten Bell confirmed the rule change in a letter to the chairman of Parliament's Public Accounts Committee, Conservative MP Sir Geoffrey Clifton-Brown, who had raised concerns about the issue after it was highlighted by BBC Radio 4's Money Box Live programme.

Bell said the move would "make the position fairer for all grieving families and friends where there are delays in the payment of death benefits, whether in the Civil Service or any other pensions scheme".

He added: "Removing the tax deadline does not remove [a pension scheme's] wider duties to administer schemes prudently and without avoidable delay."

Under the previous rules, if someone died before the age of 75, a pension lump sum death benefit was only tax-free if it was paid within two years of the pension scheme first becoming aware of the death, and if the value was below the deceased's Lump Sum and Death Benefit Allowance.

However, the government has now removed the two-year deadline so payments will no longer become taxable solely because they were made more than two years after a pension scheme was notified of the death. The change applies to payments made from 28 October.

In his letter, the pensions minister said people who had already been impacted by avoidable delays and been taxed as a result could seek compensation through the pension scheme's complaints process and the Pensions Ombudsman.

Sir Geoffrey welcomed the announcement but said it does not "absolve Capita from processing and making payments to members of this scheme in a timely manner".

Fran Heathcote, general secretary of the PCS union, also welcomed the change but said "this situation should never have arisen in the first place". She added: "Bereaved families must not pay the price for failures in the pension system.

"Capita is not off the hook, it continues to fail members and their families, which is why the scheme must be brought back in-house." Capita has previously apologised for the impact of delays on pension scheme members and their families.

The company has said it is working to resolve outstanding cases as quickly as possible, with a particular focus on people who have been waiting the longest and those facing financial hardship or challenging circumstances.