RPSM04101130 - Technical Pages: Taxation: Authorised member payments: Taxation of trivial or, winding up lump sums, commuted equivalent pension benefits and other small lump sum payments

Taxation of trivial or winding up lump sums, commuted equivalent pension benefits and other small lump sum payments

[s636B & 683 ITEPA 2003][The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171] 

The following lump sums are taxable as pension income in the tax year in which the payment is made

• commuted equivalent pension benefits (see page RPSM09105300)
• a trivial commutation lump sum (see RPSM09104900),
• a winding up lump sum (see RPSM09105100), or
• certain other small lump sum payments (RPSM09105490)

The person liable to tax is the scheme member receiving the payment.

The amount of tax due depends on whether or not the member has drawn or was entitled to any benefits from the registered pension scheme before the lump sum was paid.

If the member has not taken or was not entitled to any benefits from the scheme before payment of the lump sum the taxable amount is 75% of the amount of the lump sum payment.

If before the lump sum is paid the member has taken benefits, or was entitled to the payment of benefits, from the scheme but also had other uncrystallised rights in the scheme, the taxable amount is the amount of the lump sum paid less 25% of the value of the uncrystallised benefit rights. The uncrystallised rights must be determined in accordance with s212 FA 2004. RPSM04104670 explains how uncrystallised rights are valued for the purposes of s212 FA 2004.

If the member has no uncrystallised rights in the scheme before the lump sum is paid, the taxable amount is the total amount of the lump sum payment.

Example

Tom receives a trivial commutation lump sum of £10,000. This lump sum includes uncrystallised rights, which are valued at £5,000.

The member’s taxable pension income in respect of the lump sum payment is

£10,000 - (£5,000 x 25%) = £8,750.

As the payments are taxable as pension income the rate of tax is the member’s marginal rate of tax for the tax year in which the lump sum is paid. So if the member is a basic rate taxpayer, the rate is 20%, if a higher rate taxpayer the rate is 40% and so on.

PAYE applies to these lump sum payments. The payer of the lump sum must operate PAYE on the taxable amount of the lump sum payment in accordance with the PAYE rules before paying the lump sum.