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HMRC internal manual

Employment Income Manual

Social security pension lump sum: taxing the lump sum

Section 683 ITEPA 2003

Income Tax (Pay As You Earn) (Amendment) Regulations 2006

Because of the potential size of any state pension lump it is not feasible to restrict a PAYE tax coding to collect any tax due on a lump sum. The state pension lump sum is therefore treated as PAYE income and the Department for Work and Pensions (Pensions Service) will operate a simplified form of PAYE. An individual, at the time of finalising their state pension lump sum, will be asked by DWP to make an initial self-declaration of their highest (or marginal) rate of tax.

Tax based on this self-declaration will then be withheld by DWP when making payment of the lump sum. This self-declaration will mean for most recipients of a state pension lump sum the correct rate of tax has been applied at the time of payment. If the individual fails to make a self- declaration of their highest rate of tax, tax at the basic rate will automatically be withheld by DWP.

At the end of each tax year DWP will notify HMRC of all state pension lump sums paid, together with details of the tax withheld based on the claimants’ self-declarations. If too much or too little tax has been deducted the position will need rectifying by reference to the actual charge for the applicable year of assessment, see EIM74653. If further tax is due, a tax return for the applicable year of assessment must be issued.

Social security pension lump sum

The legislation uses the term “social security pension lump sum”. Section 9(1) Finance (No.2) Act 2005 explains that “social security pension lump sum” means

(a) a state pension lump sum,

(b) a shared additional pension lump sum, or

(c) a graduated retirement benefit lump sum.

Most social security pension lump sum payments are expected to be in respect of a state pension lump sum. For convenience, therefore, this guidance uses the term “state pension lump sum” but this should be read as including a shared additional pension lump sum and a graduated retirement benefit lump sum.