Guidance

Tax on lump sum death benefit payments

How to deal with lump sum death benefit payments and what tax to deduct.

Overview

A lump sum death benefit payment is a lump sum paid from a pension scheme following the death of the member or beneficiary.

What payments are taxable

If the member or beneficiary was 75 or over when they died or the lump sum was not paid within 2 years of you finding out, the following lump sum death benefit payments are taxable:

  • defined benefits
  • uncrystallised funds
  • drawdown pension fund
  • flexi-access drawdown fund

If the member or beneficiary was 75 or over when they died, the following lump sum death benefit payments are taxable:

  • pension protection
  • annuity protection

You should always deduct tax on trivial commutation lump sum death benefit payments through PAYE (Pay As You Earn).

How much tax to deduct

Payments before 6 April 2016

For payments other than trivial commutation lump sum death benefits, you should deduct the special lump sum death benefits charge.

Payments on or after 6 April 2016

For payments other than trivial commutation lump sum death benefits, the amount you deduct depends on who you make the payment to. You should deduct either:

  • Income Tax using the emergency tax code if paid directly to an individual (they may be able to reclaim a repayment if they’ve paid too much tax)
  • the special lump sum death benefits charge if paid to:
    • someone other than an individual
    • an individual who is receiving the payment in their capacity as a trustee, personal representative, director of a company, partner in a firm or member of a limited liability partnership

If the lump sum was paid to a trust, and then pays it to a beneficiary, the beneficiary can claim back some or all of the tax.

Information you must provide

If you pay a defined benefits or uncrystallised funds lump sum death benefit, you must provide the following information to the deceased member’s personal representative:

  • the amount of the lump sum
  • the payment date
  • the percentage of the standard lifetime allowance used up by the payment of the lump sum

You must provide this information within 3 months of the final payment.

If you deduct the special lump sum death benefits charge you must complete the Accounting for Tax (AFT) Return.

Further information

Read more about lump sum death benefit payments in the Pension Tax Manual.

Published 6 April 2016