RPSM09104180 - Technical Pages: Member benefits: Lump sums: Pension commencement lump sum: Overview: Taxation

If the lump sum was paid on or after 6 April 2011 you should first read RPSM09104195 

Taxation issues surrounding payment of a pension commencement lump sum

[s636A(5), Chptr 15A, ITEPA 2003][Para 11, Sch 31] [s208 to 212][s239 to 241] [SI 2009/1171] 

A pension commencement lump sum is paid tax-free.

Where a lump sum is paid to a member from a scheme that exceeds the permitted maximum, the excess is not a pension commencement lump sum (and does not benefit from the tax-free treatment). However, if the excess is covered by the Registered Pension Schemes (Authorised Payments) Regulations 2009 SI 2009/1171 then the excess amount can nonetheless be accepted as an authorised payment and treated under the tax rules as a pension commencement lump sum See RPSM09108040 for further details.

If the excess lump sum does not fall within SI 2009/1171 or within the definition of any of the other error payments (see RPSM12101000 onwards) it will be an unauthorised member payment. That element of the lump sum that is an unauthorised member payment will not be caught for lifetime allowance purposes (so that payment will not crystallise under BCE 6).

The unauthorised member payment will be liable to an unauthorised payments charge. The payment may also trigger an additional income tax surcharge on the member (an unauthorised payments surcharge), taking the effective tax rate to 55%. The payment may also give rise to a scheme sanction charge on the scheme administrator. More information on these tax charges can be found at RPSM04104500 to RPSM04104880.