PTM073010 - Death benefits: lump sums: tax on authorised lump sum death benefits paid on or after 6 April 2016
As of 6 April 2024 there is no longer lifetime allowance. If you are looking for information about protections, enhancement factors and the lifetime allowance charge please see these pages on The National Archives.
If you are looking for information about the principles of lifetime allowance and benefit crystallisation events please see these pages of The National Archives.
Glossary |
Types of tax charges on authorised lump sum death benefits
When the special lump sum death benefits charge applies
When the lump sum is taxable as pension income
When the lump sum exceeds the available lump sum and death benefit allowance
Operating PAYE on the recipient’s pension income
Special lump sum death benefits charge on payments made on or after 6 April 2016
Taxable lump sum death benefit payments to a trust - refund of tax to trust beneficiary
This page does not cover the taxation of a trivial commutation lump sum death benefit (PTM073700) or a winding-up lump sum death benefit (PTM073800).
Types of tax charges on authorised lump sum death benefits
Section 206 Finance Act 2004
Sections 579A, 637H to 637N Income Tax (Earnings and Pensions) Act 2003
The detailed guidance for each type of authorised lump sum death benefit (PTM073000) explains the circumstances in which a payment is tax-free and when it is taxable.
Where the authorised lump sum death benefit is taxable, the tax treatment depends on who receives the payment. The tax charge is either:
- income tax as pension income of the recipient, or
- the special lump sum death benefits charge.
When the special lump sum death benefits charge applies
Section 206 Finance Act 2004
637H(4) and (6), 637I(4), 637J(4) and (6), 637K(4), 637L(4) and (6), 637M(4) and (6) Income Tax (Earnings and Pensions) Act 2003
If a:
- defined benefits lump sum death benefit,
- uncrystallised funds lump sum death benefit,
- pension protection lump sum death benefit,
- annuity protection lump sum death benefit,
- drawdown pension fund lump sum death benefit, or
- flexi-access drawdown fund lump sum death benefit
paid on or after 6 April 2016 is taxable and it is paid to a ‘non-qualifying person’ the lump sum is subject to special lump sum death benefit charge.
For information about this tax charge go to the section Special lump sum death benefits charge on payments made on or after 6 April 2016.
Non-qualifying persons
Section 206(9) Finance Act 2004
A non-qualifying person is someone who is not an individual, e.g. a company, or an individual receiving the lump sum in their capacity as a:
- trustee (other than a bare trustee),
- personal representative,
- director of a company,
- partner in a firm, or
- member of a limited liability partnership.
When the lump sum exceeds the available lump sum and death benefit allowance
Section 637S
Income Tax (Earnings and Pensions) Act 2003
Paragraphs 126, 127 and 131 Schedule 9 Finance Act
2024
At 6 April 2024 an individual’s lump sum and death benefit allowance is £1,073,100 unless they have a protected right to a higher lump sum (see PTM172000) or have had a benefit crystallisation event occur prior to this date (see PTM174200).
The lump sum death benefit allowance applies to
certain lump sums paid after 5 April 2024. When a relevant lump sum death
benefit is paid to a beneficiary this is known as a relevant benefit crystallisation
event and it’s tested against the deceased member’s lump sum and death benefit
allowance (LSDBA). All authorised lump sum death benefits are a “relevant lump
sum death benefit” except for:
- a charity lump sum death benefit (see PTM073900)
- a trivial commutation lump sum death benefit (see PTM073700)
- a lump sum death benefit paid from rights that previously crystallised under s216 Finance Act 2004
If the lump sum death benefit paid is greater than the deceased member’s available LSDBA, the excess will be taxed at the recipient’s marginal rate.
Calculating the available lump sum and death benefit allowance
Relevant lump sum death benefits are tested against the deceased member’s LSDBA (not the recipient’s) immediately before they are paid. Any relevant lump sums taken by the member in their lifetime and any other relevant lump sum death benefits already paid are deducted from the LSDBA to arrive at the available amount.
If benefit crystallisation events occurred before 6 April 2024 there are additional steps in the calculation to determine the previously used amount. An amount equal to 25% of the total rights previously crystallised is deducted from the LSDBA. If the beneficiary has a transitional tax-free amount certificate from the scheme administrator, the previously used amount shown will be deducted instead (see PTM174100).
Example
Isha dies, aged 72, on 30 April 2024 leaving £200,000 in a flexi-access drawdown and £1,000,000 uncrystallised funds. On 30 July 2024 the scheme administrator pays a flexi-access drawdown lump sum death benefit of £200,000 and an uncrystallised funds lump sum death benefit of £1,000,000 to a nominee who is a not a non-qualifying person.
The funds used to pay the flexi-access drawdown lump sum death benefit previously crystallised under section 216 Finance Act 2004, which means the lump sum payment is not a relevant lump sum death benefit.
The uncrystallised funds lump sum death benefit is a relevant lump sum death benefit and therefore a relevant benefit crystallisation event.
The personal representative holds a transitional tax-free amount certificate showing the lump sum and death benefit transitional tax-free amount is £100,000.
Isha’s available LSDBA is £973,100 (£1,073,100 less the previously used amount of £100,000).
£973,100 of the uncrystallised funds lump sum death benefit can be paid tax free. £26,900 of the payment exceeds Isha’s allowance and is taxed at the recipient’s marginal rate.
Example
Jim dies, aged 74, on 1 November 2024 leaving £500,000 in a dependants’ flexi-access drawdown fund. The fund Jim held originated from Rosie who died in 2022. Rosie designated funds to a flexi-access drawdown fund prior to her death and these were crystalised as benefit crystallisation event 1.
The scheme pays a flexi-access drawdown fund lump sum death benefit to Jim’s beneficiary on 15 January 2025. Because the funds were crystallised by Rosie, this is not a relevant lump sum death benefit and there is no need to test the payment against the lump sum and death benefit allowance.
When the lump sum is taxable as pension income
637H, I, J, K, L and M Income Tax (Earnings and Pensions) Act 2003
A taxable:
- defined benefits lump sum death benefit,
- uncrystallised funds lump sum death benefit,
- pension protection lump sum death benefit,
- annuity protection lump sum death benefit,
- drawdown pension fund lump sum death benefit,
- flexi-access drawdown fund lump sum death benefit
paid on or after 6 April 2016 will be taxable as pension income if the recipient is an individual who is not a ‘non-qualifying person’.
The lump sum payer should deduct tax under PAYE by way of the RTI process.
Operating PAYE on the recipient’s pension income
Where the recipient is liable to the income tax charge, it is treated as the recipient’s pension income and tax deducted under PAYE by way of the RTI process. The rate of tax is the recipient’s marginal rate of tax for the tax year in which the lump sum is paid. So, if the individual is a basic rate taxpayer, the rate is basic rate and if the individual is a higher rate taxpayer the rate is the higher rate applying to the individual.
The pension payer should use the following PAYE codes:
- If the recipient has a P45 from a previous source/employment dated on or after 6 April in the current year, the scheme administrator should operate the code on the P45 on a Month 1 basis.
- If a scheme administrator already makes payments to the recipient and has a tax code for those payments, the tax code should only be used for additional payments 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.
- For other trivial commutation lump sum death benefits and winding up lump sum death benefits, use the BR code.
- In all other circumstances, scheme administrators should use the emergency code on a Month 1 basis against the payment and HMRC will issue a tax code to operate against future payments.
Further guidance on how to operate PAYE correctly on these lump sums can be found in CWG2 - Employer’s further guide to PAYE and NICs (GOV.UK) (link is external).
There is also guidance for pension schemes on how to operate PAYE on the gov.uk website at https://www.gov.uk/paying-a-company-pension-or-annuity-through-your-payroll (link is external). This includes guidance on how to operate PAYE on trivial and winding up lump sums.
Where the beneficiary is receiving a lump sum payment that extinguishes the fund, the scheme administrator must issue a P45 which will enable the recipient to claim any tax refund that might be due in-year.
Because of the way PAYE works, using the emergency or BR code on these lump sum payments may mean that the recipient ends up paying too much tax. Where this does happen, the person who has paid too much tax can claim the tax back in-year. Scheme members can find more information on claiming a tax refund on the gov.uk website at https://www.gov.uk/tax-on-pension-death-benefits (link is external).
Many of the people affected won’t know that they may have paid too much tax and so are entitled to a tax refund. To help the people affected it would be helpful if the pension payer includes advice on how to claim a refund when issuing the lump sum payment. Some suggested wording that the pension payers could use is shown below. This will also help the payer by reducing the number of enquiries they may get on how the lump sum has been taxed and claiming refunds.
Suggested wording pension payers can use when making the PAYE lump sum payment
“Your form P45 details include the amount of tax deducted from your lump sum death benefit. The tax deducted may not be the right amount due when all of your income for the year is taken into account.
After next 5 April HM Revenue & Customs will check if you have paid the correct amount of tax, and if not they will contact you. But if you think you have paid too much tax you can ask HM Revenue & Customs for a tax refund now - you do not have to wait until 5 April.
To claim a refund you can complete a form online without needing to contact HMRC directly. You should find this easier to do than completing the form manually. The form is available on the gov.uk website at https://www.gov.uk/claim-tax-refund/you-get-a-pension (link is external).
If you prefer to complete the form manually, find out which form you need on the above website and then call the Taxes Helpline on 0300 200 3300. It helps if you have your National Insurance number to hand when you call.”
Special lump sum death benefits charge on payments made on or after 6 April 2016
Sections 206 and 254 Finance Act 2004
The Pension Benefits (Insurance Company Liable as Scheme Administrator) Regulations 2006 Section – SI 2006/136
The rate of the special lump sum death benefits charge is 45%.
The person liable to pay this tax charge in respect of a:
- defined benefits lump sum death benefit, or
- uncrystallised funds lump sum death benefit
is the scheme administrator.
The scheme administrator is liable to pay the tax charge where the following lump sums are paid from the registered pension scheme:
- pension protection lump sum death benefit,
- annuity protection lump sum death benefit,
- drawdown pension fund lump sum death benefit,
- flexi-access drawdown fund lump sum death benefit.
Where one of those lump sums was paid by an insurance company, that insurance company is liable to pay the tax charge as if they were the scheme administrator.
The payer of the lump sum usually deducts the tax charge before paying the lump sum. The tax charge should be reported and paid using the Accounting for Tax return procedure - see PTM162000.
The lump sum is not treated as income of the recipient for any purpose of the Tax Acts. As the recipient is not liable to pay the tax charge, if they are a non-taxpayer they cannot make any repayment claim in respect of the tax paid. However, there is an exception where the tax charge is paid in respect of a payment to a trust that is not a bare trust, and that trust later makes a payment, funded by the lump sum death benefit, to a beneficiary of that trust. See Taxable lump sum death benefit payments to a trust - refund of tax to trust beneficiary (below).
Taxable lump sum death benefit payments to a trust - refund of tax to trust beneficiary
Where:
- the special lump sum death benefits charge is charged on payment on or after 6 April 2016 to a trust that is not a bare trust, and
- the trustee later makes a payment comprised of all or part of that lump sum death benefit to a beneficiary of that trust,
the gross amount is income for income tax purposes of the individual who is the trust beneficiary, but they can set-off the appropriate amount of charge previously paid by the scheme administrator against their own tax due on the payment. The appropriate amount is the proportion of the tax charge that is attributable to the amount received by the trust beneficiary. For example, if two beneficiaries each receive 50% of the lump sum death benefit received by the trust, they can each set off against their own income tax liability 50% of the tax charge paid by the scheme administrator.
The individual must account for the gross amount of lump sum death benefit they received from the trust in their Self-Assessment return, or on R40 repayment claim form. That is the total of the amount paid to them by the trust, and the proportion of the special lump sum death benefits charge attributable to that amount that was withheld by the scheme administrator. That proportion of the special lump sum death benefits charge is treated as tax previously paid. The overall effect is that tax on the lump sum death benefit is paid at the individual’s marginal rates, as if they had received the payment from the pension scheme directly.
Where the proportion of special lump sum death benefit charge ‘tax previously paid’ exceeds the individual’s total income tax liability for the year, the difference can be repaid to the individual.
Both the scheme administrator and the trustee must follow the requirements for provision of information so that the individual understands the amounts to include in their tax return to claim any repayment. See PTM165100 and PTM165400.
There is no time limit for onward payment of the lump sum death benefit from the trust to the individual.