Termination payments on leaving the armed forces

Updated on 13 November 2017

When you leave the armed forces, you may be entitled to a termination payment. Your entitlement to termination payments depends on:

  • why you are leaving the armed forces; and
  • which Armed Forces Pension Scheme (AFPS 15, AFPS 75 or AFPS 05) you have an entitlement under.  

If you have been in the armed forces for several years you will have built up entitlements to both:

  • a pension which is payable when you reach retirement age; and
  • payments when you leave before retirement age

under more than one AFPS. It is beyond the scope of this guidance to help you determine which payments you are entitled to and when you will receive them. You can find out more information on the GOV.UK website.

If you are leaving the armed forces as part of a redundancy programme then you may be entitled to additional payments.

I have received a payment under the Early Departure Scheme (EDS); how much tax will I pay?
I have received a Resettlement Grant (RG); how much tax will I pay?
I will receive an immediate pension; how much tax will I pay?
I have received payments under the Armed Forces Compensation Scheme (AFCS); how much tax will I pay?
I have been made redundant; how does this affect the payments I receive?
Warning

I have received a payment under the Early Departure Scheme (EDS); how much tax will I pay?

EDS payments are made under either AFPS 15 or AFPS 05. 

The payments under AFPS15 are

  • a lump sum amount paid at the time you leave the armed forces; and
  • a regular income paid until you reach state pension age and your deferred armed forces pension becomes payable.

The payment under AFPS05 is a lump sum only.

In both cases the lump sum is tax free. The regular income payment under AFPS15 is taxed under Pay As You Earn (PAYE). You can find more information on the EDS in the service leaver’s guide on GOV.UK and on the guide to your pension scheme, also on GOV.UK.

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I have received a Resettlement Grant (RG); how much tax will I pay?

The RG is a lump sum payment and is tax free.

You can find more information on the RG in the service leaver’s guide on GOV.UK and on the guide to your pension scheme, also on GOV.UK.

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I will receive an immediate pension; how much tax will I pay?

Each AFPS has a different normal retirement age. If you have accrued benefits under different AFPSs you will receive part of your pension at different times. 

You will receive a regular pension which will be taxed under PAYE but is not subject to NIC. You may also receive a tax free lump sum payment.

If you are receiving an immediate pension because of ill health or injury that is not related to your service with the armed forces the payments you receive will be taxed as outlined above. If your ill health or injury is related to your service with the armed forces the tax treatment may differ; please see the section below.

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I have received payments under the Armed Forces Compensation Scheme (AFCS); how much tax will I pay?

Payments under the AFCS are normally made as a result of an injury or ill heath caused by your service with the armed forces. Payments will always include a lump sum amount which is tax free.

If your injury or ill health makes it more difficult for you to find employment outside of the armed forces you will also receive a Guaranteed Income Payment (GIP). The GIP is a regular payment; it is paid for life and is tax free.

In addition to the GIP you might also receive a pension under one or more of the AFPSs. In most circumstances, where the pension is paid because of injury or ill health caused by your service with the armed forces, this too will be paid tax free.

You can find more information on the AFCS on GOV.UK.

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I have been made redundant; how does this affect the payments I receive?

There are two Armed Forces Redundancy Schemes (AFRS), AFRS 2010 and AFRS 2006. These schemes are explained in a document called “The Armed Forces Redundancy Schemes” number MMP138, available on GOV.UK.

When you are made redundant you will receive either:

  • a Special Capital Payment (under AFRS 2010); or
  • a Compensation Lump Sum (under AFRS 2006).

Both these payments are tax free.

You will also be entitled, if your circumstances meet the criteria, to other payments under the AFCS.  

The document MMP138 provides details of how the amount of the SCP and CLS is calculated.

There is more general information about redundancy in our ‘employed section’.

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Warning

If you are receiving employment/pension income from two or more sources, for example an armed forces pension and a wage from an employment, you must ensure that the PAYE codes applied to each income source are correct. You can find out more about checking your PAYE code in the ‘employed section’ of our website

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