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Pensions paid on leaving the armed forces
This section provides an overview of the taxation issues associated with the pensions you might receive when you leave the armed forces, whether because your term of service has ended, you are wounded or disabled or for any other reason.
Is my pension from my service in the armed forces taxable?
Your pension is fully taxable unless it is one of the following:
- Payment made for wounds or disability under the Armed Forces Compensation Scheme or one of the schemes that it replaced;
- Pension paid to you as a holder of an award for bravery in respect of that award. The relevant awards for bravery are:
- the Victoria Cross
- the George Cross
- the Albert Medal
- the Edward Medal
- the Military Cross
- the Distinguished Flying Cross
- the Distinguished Conduct Medal
- the Conspicuous Gallantry Medal
- the Distinguished Service Medal
- the Military Medal
- the Distinguished Flying Medal
In other words, pensions arising from your normal service duties are taxable in full, although you may be able to take a tax free lump sum when you start to draw your pension. You can read more about this on GOV.UK.
I’ve been told part of my pension will be taxable, but the rest won’t be. Is this right?
This can be the case if only part of your armed forces pension is held to be tax-free as a result of injury or disablement during service. You will receive a letter confirming the position when you start to receive the pension.
This might also be the case if you are already receiving a service pension before your claim to a disablement pension as a result of service is established. In that case your service pension would remain taxable while the pension for disablement would not be.
How do I check I am paying the correct amount of tax on my pension?
Once you have established that your pension is taxable, you should check that an appropriate code number is being operated against your pension income. If you think the code number being operated is incorrect, you should contact HMRC.
What if I retire abroad?
Your armed forces pension remains fully liable to UK taxes and will continue to have PAYE deducted at source, in accordance with the code number allocated to this income. However, depending on the tax arrangements in the country where you are resident, you may be able to arrange to have your pension paid with no UK tax deducted if it will be taxable in your country of residence. We recommend you read the separate page What happens if I retire abroad? and take professional advice as necessary.
I was in the Gurkhas. Is my pension taxable?
In principle, these pensions are taxable in the UK, but for those pensions paid by the Nepal Pension and Payment system, no UK tax is deducted from them on a concessionary basis on the basis that most are below the UK personal allowance. For pensions that are paid through the UK payer, Paymaster (1836) Ltd, UK tax is deducted at the basic rate. Note that if you are not using your personal allowance against other employment or pension income, you can request that it be set against this pension, but it is not normally done automatically.
Be careful because if you are resident in the UK, but your pension is paid by the Nepal Pension and Payment System, you will need to tell HMRC that you receive it.
Normally you will not receive a pension from the Gurkhas pension scheme unless you have completed at least 15 years’ service. You may receive certain gratuities, though. The taxability of these sums is complex and you should read the relevant pages in the booklet on the Gurkha pension scheme, on GOV.UK.
In due course, depending on your length of service, you may also start to receive the UK state pension from state pension age. You can read more about the state pension on our page Approaching retirement.
HMRC have issued me a form P800 (tax calculation) and say I owe them tax. Do I have to pay it?
If the tax calculation is correct, then the answer is probably ‘yes’. You can read how to check the P800 tax calculation in our employment section. That section also explains what you can do if your employer (or pension payer) did not operate PAYE properly or HMRC failed to use information properly. In either of those cases it is possible you will not have to pay over the tax that has been requested.
Where can I find further information?
Veterans UK is part of the Ministry of Defence and provides information on pensions, among other matters.