RPSM09105150 - Technical Pages: Member benefits: Lump sums: Winding up lump sum: Taxation

Taxation of the winding-up lump sum

[Para 11, Sch 31][s636B, Chapter 15A, ITEPA 2003][Para 59, Sch 10, FA 2005]

A winding-up lump sum is taxed on the member in exactly the same way as a trivial commutation lump sum.

If the member has not previously drawn (or become entitled to) any other benefits under the registered pension scheme before the winding-up lump sum is paid 75% of the lump sum paid is treated as taxable pension income of the member for the tax year the payment is made, accountable through PAYE.

A 25% deduction is given to reflect that if normal benefit rules applied, the member would generally be entitled to a tax-free pension commencement lump sum, representing 25% of the capital value of the benefits coming into payment. No extra deduction is given where the member is entitled to a pension commencement lump sum of more than 25% due to the transitional protection of such an entitlement held before 6 April 2006.

Where a pension in payment is being commuted, or the member has previously drawn (or become entitled to) any other benefit from the scheme, then credit is given for any pension commencement lump sum that potentially could be drawn from any uncrystallised rights held in any arrangement under the scheme. In this circumstance, 25% of the value of the uncrystallised rights may be paid tax-free, with the remaining part of the payment being treated and taxed as pension income. RPSM04104670 explains how we value uncrystallised rights for these purposes.