RPSM09105490 - Technical Pages: Member benefits: Lump sums: Other small lump sum payments: Taxation

Taxation

[Regulation 3 SI 2009/1171] [s164(1)(f)]

The legislation authorises certain small lump sums to be paid from a registered pension scheme without having to follow the more demanding conditions for what is formally termed a trivial commutation lump sum.

Such one-off small lump sum payments are allowed as authorised member payments in circumstances prescribed in regulations: these allow certain one-off payments of a modest amount, to be made in relation to individual registered pension schemes, or related occupational pension schemes. The circumstances under which such one-off payments can qualify as authorised member payments are set out in RPSM09105420 to RPSM09105480.

Where a member receives one of these small lump sum payments, the payment itself is not classed as a trivial commutation lump sum, even though the amount may be quite small. However, the payment does get taxed in the same way as a trivial commutation lump sum would be.

This means that where the payment represents uncrystallised benefit rights, 25% of the payment is free of income tax, and the balance of the payment is chargeable to income tax as pension income. Alternatively, if the payment represents crystallised rights, all of the payment is chargeable to income tax as pension income. Where the payment represents a mixture of both uncrystallised and crystallised benefit rights only 25% of the part of the payment relating to the uncrystallised rights can be paid free of income tax.

When the one-off payment is made to someone other than the member, such as when the payment is made after the death of the member, the payment itself is not classed as either a trivial commutation lump sum, nor is it classed as a trivial commutation lump sum death benefit. However, the payment does get taxed in the same way as a trivial commutation lump sum death benefit would be. Basically, this means that in such circumstances, all of the payment is chargeable to income tax as pension income.

In all cases, the payer of the one-off lump sum must operate PAYE to account for the tax due on as much of the payment as is subject to income tax - as explained above. The operation of PAYE is outside the scope of this manual (see Chapter 2, Section 23 of: www.hmrc.gov.uk/guidance/cwg2.htm).

More information about the taxation of trivial commutation lump sums and trivial commutation lump sum death benefits generally can be found in RPSM04101130 and RPSM04101140 respectively.