What tax do I pay on my state pension lump sum?

When might I receive a state pension lump sum?

If you reached state pension age before 6 April 2016 and deferred receiving your state pension for at least 12 months in a row, you can choose to receive a one-off lump sum – in addition to your regular state pension – when you later decide to draw your state pension. This is taxed as income, but in a special way, unlike other pension income.

Alternatively, you may receive a state pension lump sum because your spouse or civil partner chose to defer their state pension but died before any lump sum was paid.

If you reached state pension age on or after 6 April 2016, you may still defer receiving your state pension, but you will not be entitled to receive a lump sum.

You can find out when you are due to reach state pension age using the calculator on GOV.UK.

Backdated state pension claims

⚠️ Important note: The special tax rules on this page do not apply to any payments you might receive when you backdate a claim to the state pension (see below). They apply only to lump sums accrued when deferring pre-6 April 2016 state pensions.

You can backdate a claim to the state pension by up to 12 months. So if, for example, you reach state pension age on 1 October 2023 but do not claim it at that time, up to 30 September 2024 you can still backdate your claim as if you had originally made it at 1 October 2023.

In such cases, the state pension will be taxed in the year it would have been paid, had the claim been made at the appropriate time. Therefore, using 1 October as in the above example, any state pension that would have been due to be paid to you between 1 October 2023 and 5 April 2024 will be taxable in the 2023/24 tax year. Any amount due from 6 April 2024 will then be taxable in 2024/25.

This is effectively just a catch-up payment of the state pension you would have been due to receive if you had claimed it earlier, so there is no special tax treatment in this situation.

What tax do I pay on my state pension lump sum?

Put simply, the rate of tax that will be used on your state pension lump sum is generally the highest rate that applies to your other income for that tax year.

All else being equal, this is intended to avoid the lump sum (or part of it) being taxed at a higher rate than you would have paid had you not deferred it. However, the rules may not necessarily give that result.

While this can mean you can pay no tax at all on such a lump sum (if all of your taxable income falls within your personal allowance, for example), it is important to bear in mind that when you are looking at your ‘other income’ you must ignore the 0% rates which are used to tax savings and dividend income – that is the starting rate for savings, the savings nil rate (or personal savings allowance) and the dividend nil rate (or dividend allowance). In other words, the question is what is the highest rate of tax which would apply if income falling in these 0% rates were taxed at the normal rates. This can make a significant difference to the tax payable on the lump sum. See below for some examples.

For this purpose, because we are looking at the tax rate applicable, we ignore any allowances and reliefs which are in fact ‘tax reducers’ in the tax calculation, such as the marriage allowance (as it applies to the member of the couple receiving it) and the married couple’s allowance. Please see the page What tax allowances am I entitled to? for more information, but see also the ‘word of warning’ note below relating to the marriage allowance.

If you are a Scottish taxpayer, different income tax rates and bands apply to your non-savings and non-dividend income. State pension lump sums count as non-savings and non-dividend income and are liable to income tax according to the Scottish rates and bands. There is more information in our section on Scottish income tax.

From 6 April 2019, a Welsh income tax also applies, however for 2023/24 there is no practical effect on the amount of tax Welsh taxpayers have to pay.

The Pension Service deducts tax from the lump sum on making the payment, having taken account of information that you provide as to your rate of tax. As the calculation is made during the tax year, it will not always be correct. If the wrong tax rate is used an overpayment of tax may arise or you may have to pay more tax to make up the difference. HM Revenue & Customs (HMRC) will make the adjustment after the year end.

If you live in Scotland and are a Scottish taxpayer, The Pension Service deducts tax at either 20% or 40% (UK rates), rather than the Scottish rate at which you are liable. If the correct rate should be anything other than the Scottish basic rate (20%), then the deduction will be incorrect. You will either have an underpayment or an overpayment of tax. Normally HMRC will reconcile the position after the end of the tax year, and they will send you a repayment or ask you to pay any additional tax that you owe. If you are a Scottish taxpayer, it is particularly important therefore that you check what tax has been deducted and how much you should have paid.

⚠️ Word of warning: marriage allowance

The marriage allowance, or transferable tax allowance, works in a strange way. The member of the couple that gives up 10% of their personal allowance to their partner has a reduced personal allowance. But the partner receiving the allowance does not get a higher personal allowance, they instead get a tax credit.

Example

Let’s say that Janet elects to 'transfer' 10% of her tax allowance to her husband Bill in 2023/24.

Her reduced personal allowance for 2023/24 is £12,570 - £1,260 = £11,310.

If she then claims a state pension lump sum in 2023/24, she will be a taxpayer if her other taxable income is more than £11,310. Tax on the lump sum would then be due.

However, Bill’s personal allowance for 2023/24 will stay at £12,570. The 10% that Janet has transferred to him is not added to this figure. Instead, it gives him a tax credit of £252 (£1,260 x 20%) to take off his tax bill.

So if Bill takes a state pension lump sum in 2023/24 and his other taxable income is more than £12,570, tax will be due on the state pension lump sum. The tax due on the state pension lump sum cannot therefore be reduced by the marriage allowance.

When is a state pension lump sum taxed?

The state pension lump sum is usually taxed in the year in which you stop deferring and decide to claim it. The point at which the lump sum is taxable is the tax year in which the first benefit payment date falls. This will usually be the same tax year in which you notify the DWP’s Pension Service of your claim to the state pension. However, if you claim very close to the tax year end, it could be the next tax year.

For example, Richard decides to stop deferring his state pension at the end of the 2022/23 tax year and notifies the Pension Service of his claim to the state pension on 5 April 2023. He tells them that he wants to claim a lump sum for the period in which he has been deferring his claim. He is informed that the first weekly entitlement date for his state pension will be 12 April 2023. This means that his lump sum will be taxable in 2023/24 unless he claims to delay receipt of it until April 2024, in which case it will be taxable in 2024/25 (see below). So even though Richard claimed his state pension in 2022/23, the default tax point for the lump sum is in 2023/24.

Claiming to delay receipt of a state pension lump sum to the start of the next tax year

You can choose to delay payment of the lump sum to the next tax year to the one in which you stop deferring, which means that it will then be taxed in that later year. You might choose to do that if, for example, you are a basic rate (20%) taxpayer in the year you stop deferring but will be a non-taxpayer the following year.

⚠️ Note: if you wish to delay receiving a state pension lump sum to the start of the next tax year, you need to tell the Pension Service when you claim the lump sum, or within a month of the date you make the claim.

For example, Matthew lives in England and reached state pension age in February 2016 but continued working up until February 2023. He chose to defer claiming his state pension until he stopped work. From 6 April 2022 to his retirement in February 2023, he earned £18,000 so he was a basic rate taxpayer in 2022/23. In 2023/24, however, his only income will be his state pension of £156.20 a week (£8,122.40 for the year). His 2023/24 income is therefore below his personal allowance of £12,570, meaning he is a non-taxpayer.

Matthew starts taking his weekly pension from 1 March 2023 but asks The Pension Service to defer payment of his state pension lump sum until the start of the 2023/24 tax year. They pay the lump sum on 10 April 2023. Matthew pays no tax on the lump sum, as he is a non-taxpayer in 2023/24. If he had taken the lump sum in March 2023 when he stopped deferring, he would have paid 20% tax on the lump sum, so would have ‘lost’ £20 in tax for every £100 of lump sum.

What if I die before I receive my state pension lump sum?

If you are married or in a civil partnership, the lump sum will be paid to your surviving spouse or civil partner as noted in the question below. Otherwise, if you had claimed the lump sum before you died, it will be paid to your estate. If you had not claimed it before you died, any accrued lump sum is lost and only three months of State Pension can be claimed by your personal representatives. Normally the lump sum would become payable and be liable to income tax in the tax year of your death.

If you had made an election to receive the lump sum in a later tax year, it will remain payable and liable to income tax in the tax year of your death if you were to die before the start of that later year. On the other hand, if you die in the later tax year, having made this election, the lump sum will be taxable in the tax year of your death. In other words, in either of these scenarios the lump sum remains liable to income tax in the tax year of your death.

Where you die within the period when you might have elected to receive the lump sum in a later tax year, but had not made any such election, it is possible for your executors or personal representatives to make that election on your behalf so that the lump sum is payable and liable to tax in the later tax year, provided that you survived until at least 6 April in the later tax year.

If the lump sum is payable to your estate, it will form part of your estate for inheritance tax purposes.

What tax do I pay on my late spouse’s (or civil partner’s) state pension lump sum?

The tax is calculated as shown above and is payable by you for the tax year when the lump sum payment is due to be paid. The due date for payment of that lump sum depends on whether you are already receiving your state pension when your spouse or civil partner dies.

If you are already receiving your state pension, the lump sum becomes payable and is taxable on the date of your spouse’s or civil partner’s death. On the other hand, if you are not yet receiving a state pension at that time, the lump sum becomes payable and taxable at the time you become entitled to your state pension.

Examples

Monique, a non-taxpayer

Monique, who lives in England, is claiming her deferred state pension lump sum. The lump sum that has accumulated is £55,000 and she claims it at the same time as her state pension.

She retires from her part time job in January 2024 having earned £8,000 since 6 April 2023. Her state pension will be £149 a week, which she claims from 1 February 2024. It is therefore paid for 9 weeks by the end of the tax year, 5 April 2024. She has no other income and plans to put £50,000 of her lump sum into tax-free premium bonds and the other £5,000 into a tax-free cash ISA.

Monique’s total taxable income for 2023/24 is therefore:

• Wages from part-time job: £8,000
• State pension (9 weeks x £149): £1,341
• Total: £9,341

Her personal allowance for 2023/24 is £12,570, so her total taxable income is well within that figure. This means she is a non-taxpayer and therefore the £55,000 lump sum will also be tax-free.

Luke, a basic rate taxpayer

Luke, who lives in England, claims a state pension lump sum of £25,000 in tax year 2023/24. His other income for 2023/24 consists of earnings of £26,730 and state pension of £6,440. For the tax year 2023/24 he is entitled to a personal allowance of £12,570. The upper limit at which you are taxed at basic rate in 2023/24 is £37,700.

First, we need to work out what Luke's taxable income (leaving out the state pension lump sum) is for tax year 2023/24:

• Earnings: £26,730
• State pension: £6,440
• Less personal allowance: (£12,570)
• Total income less allowances: £20,600

Next, we work out what Luke’s highest rate of income tax is for 2023/24. As Luke's taxable income of £20,670 is not more than the basic rate limit of £37,700, this is taxed at the basic rate of 20%.

Luke's state pension lump sum is taxed at his highest rate of tax, which is 20%. The tax on his lump sum is therefore £25,000 x 20% = £5,000.

When he applies for a state pension lump sum, the Department for Work and Pensions (DWP) (that is, The Pension Service) ask Luke to advise them of his expected highest rate of income tax. Assuming he declares the basic rate, then The Pension Service will take off tax of 20% from the lump sum at the time they pay it to him.

Graeme: example of taxpayer with savings income

Graeme, who is not a Scottish taxpayer, is entitled to a state pension lump sum of £27,500 in 2023/24. His other income for 2023/24 is earnings of £5,500, state pension of £5,000 and savings interest of £3,000.

So, his taxable income (excluding the state pension lump sum) for 2023/24 is:

• Earnings: £5,500
• State pension: £5,000
• Savings interest: £3,000
• Less personal allowance: (£12,570)
• Total income less allowances: £930

Next, we determine the highest rate of tax payable by Graeme, ignoring special rates for savings income. Graeme’s taxable income of £930 falls entirely within the basic rate band of tax.

Graeme’s state pension lump sum is taxed at his highest rate of tax, which is 20%. The tax on his lump sum is therefore £27,500 x 20% = £5,500.

This is despite the fact that Graeme does not actually have a tax liability on his income – his earnings and state pension fall within his personal allowance. The part of his savings interest that is not covered by the personal allowance falls within his personal savings allowance and is therefore taxable at 0%.

⚠️ Note: If Graeme had any tax ‘exempt’ income such as savings income from Individual Savings Accounts, this would be left out of the above calculations. That is, it would not affect the rate of tax on his deferred state pension lump sum.

Debbie: example of taxpayer with dividend income

Debbie, who is not a Scottish taxpayer, is entitled to a state pension lump sum of £20,500 in 2023/24. Her other income for 2023/24 is earnings of £8,500, state pension of £2,500, savings interest of £6,000 and dividend income of £900.

So, her taxable income (excluding the state pension sum lump) for 2023/24 is:

• Earnings: £8,500
• State pension: £2,500
• Savings interest: £6,000
• Dividend income: £900
• Less personal allowance: (£12,570)
• Total income less allowances: £5,330

Next, we determine the highest rate of tax payable by Debbie, ignoring special rates for savings income and dividends. Debbie’s taxable income of £5,330 falls entirely within the basic rate band of tax.

Debbie’s state pension lump sum is taxed at her highest rate of tax, which is 20%. The tax on her lump sum is therefore £20,500 x 20% = £4,100.

This is despite the fact that Debbie does not actually have a tax liability on her income – her earnings and state pension fall within her personal allowance of £12,570. Her savings interest falls within the remainder of her personal allowance, the £5,000 0% starting rate for savings band (within the basic rate band) and the personal savings allowance. Her dividend income falls within her dividend allowance of £1,000.

Jane, a basic rate taxpayer who opts to receive her lump sum in a later tax year

Jane is employed for the first part of 2023/24 and earns £11,500. She then receives a state pension of £125.95 for the last 13 weeks of the tax year (£1,637). Her total income for the tax year is £13,137. This is above her personal allowance of £12,570 so she is a basic rate taxpayer for the year. She decides to defer receiving her state pension lump sum until 2024/25. Her other income for that year is expected to be her state pension only and she will therefore not pay tax for 2024/25. On that basis her state pension lump sum will not be liable to tax in 2024/25 whereas it would have been liable to basic rate tax (20%) in 2023/24.

Does taking a deferred state pension lump affect tax on my capital gains?

The deferred state pension lump sum is not included in your total income when calculating your tax. As described above, you work out the highest main tax rate that applies to your other income and then that is used to tax the lump sum.

This means that in turn, your basic rate band is not ‘used up’ by the lump sum and is therefore available to use when working out any capital gains tax for the year. Likewise, the capital gain will not affect the rate of tax on the lump sum, as the legislation states that the rate of tax applied to the lump sum is calculated by reference to the income tax calculation, and the highest tax rate applied to your other income for the year.

Where can I find more information?

For more information on deferring the state pension, see What is state pension deferral?.

The DWP has published a guide on deferring your state pension, which includes information on state pension lump sums. You can find this guide on GOV.UK.

We have had reports from individuals that they have been given incorrect information by DWP/The Pension Service and HMRC helplines on how pre-6 April 2016 state pension lump sums are taxed. You might find it useful to note the following:

• The law on which the above guidance is based is found in Finance (No 2) Act 2005, sections 7 to 10;

• HMRC’s official guidance for their staff on this tax treatment is in the Employment Income Manual at EIM75750.

If you have been misinformed by HMRC, you could consider making a complaint. Information about how to complain to DWP/The Pension Service can be found on GOV.UK.