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HMRC internal manual

PAYE Manual

HM Revenue & Customs
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PAYE operation: pensioners: Lump sum death benefit payments

Lump Sum Death Benefits

In the 2015 summer budget the government confirmed that from April 2016 taxable lump sum death benefits will be subject to tax at the recipients marginal rate of income tax, instead of the current flat rate 45% special lump sum death benefits charge (reduced from 55% by section 2 Taxation of Pensions Act 2014 (TPA 2014)).

Taxable lump sum death benefits that are paid to individuals will become their liability instead of the scheme administrator and be taxed as PAYE pension income.

Lump sum death benefits are taxable where the member dies aged 75 or older. Where the member was under age 75 at the time of death, the lump sum death benefit is tax-free, unless it is paid out more than 2 years after the scheme administrator became aware of the death. In these circumstances the payment is taxable at the recipient’s marginal rate.

Where taxable lump sum death benefits are paid to persons who are not individuals (such as a trust, or a company) scheme administrators remain liable to the special lump sum death benefits charge at 45%.

Taxable Lump Sum Death Benefit - PAYE

Normal PAYE rules will apply to these payments, when tax is due.

If the individual has a P45 from a previous source / employment dated on or after 6 April in the current year, the scheme administrator will operate the code on the P45 on a Month 1 basis.  We will issue a tax code to operate against future payments.

If a scheme administrator was already making payments to the individual and has a tax code for those payments, the tax code should only be used for an additional death benefit payment if the payments are being made at the same time.  If more than one payment in a month is made and the same tax code is operated against each of those payments it could give the benefit of the tax allowances and rate bands twice.

In all other circumstances, including where individuals have a P45 from the previous tax year, the scheme administrator will use the emergency tax code on a month 1 basis against the first payment and we will issue a tax code to operate against future payments.

Where a one-off Lump Sum Death Benefit payment is received the scheme administrator will issue a P45 which will enable the member to claim any tax refund that might be due in-year.

PAYE94055 provides guidance on how to deal with an in-year claim for repayment.