Updated on 6 April 2026

Tax on deferred state pension lump sums

This page explains what tax is applied to a state pension lump sum, which you might receive if you reached state pension age before 6 April 2016 but chose to defer (that is, delay or put off) receiving your state pension until a later date.

a pile of post-it notes, the top one reads 'LUMP SUM PAYMENT' in back ink. next to this is a calculator
bangoland / Shutterstock.com

Content on this page:

Introduction

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. The lump sum is paid at an enhanced rate, as discussed in our separate guidance. This lump sum 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. You can read more about this under the heading: Dying before you receive your state pension lump sum.

If you reached state pension age on or after 6 April 2016, you may still defer receiving your state pension for up to 12 months, but you will not be entitled to receive an enhanced lump sum. If you are simply backdating your claim for the new state pension in this way, this is not covered by the special rules that follow. You can read more about tax on backdated claims on our page Tax on the state pension.

Tax on the lump sum

The rate of tax that will be used on your state pension lump sum is generally the highest income tax rate that applies to your other income for the applicable tax year. See the heading below: Tax year in which the lump sum is taxed. 

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.

This can mean you can pay no tax at all on such a lump sum (for example, if all of your other taxable income, excluding your lump sum, falls within your personal allowance), but it is important to bear in mind that when you are looking at your ‘other income’ you must include any regular state pension that will come into payment once deferral stops. 

Example: A non-taxpayer claims a pre-6 April 2016 state pension lump sum

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 starting to receive her regular state pension payments.

She retires from her part time job in January 2027 having earned £8,000 since 6 April 2026. Her state pension will be £184.90 a week, which she claims from 2 February 2027. It is therefore paid for 9 weeks by the end of the tax year, 5 April 2027. She has no other income and plans to put £50,000 of her lump sum into tax-free NS&I premium bonds and the other £5,000 into a tax-free cash ISA (Individual Savings Account).

Monique’s total taxable income for 2026/27, excluding the lump sum, is therefore:

  • Wages from part-time job: £8,000
  • State pension (9 weeks x £184.90): £1,664.10
  • Total: £9,664.10

Her personal allowance for 2026/27 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.

Example: A basic rate taxpayer claims a pre-6 April 2016 state pension lump sum

Luke, who lives in England, claims a state pension lump sum of £25,000 in tax year 2026/27. His other income for 2026/27 consists of earnings of £26,730 and regular state pension payments of £6,440. For the tax year 2026/27 he is entitled to a personal allowance of £12,570. The upper limit for amounts taxed at basic rate in 2026/27 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 2026/27:

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

Next, we work out what Luke’s highest rate of income tax is for 2026/27. As Luke's taxable income of £20,600 is less than the basic rate upper limit of £37,700, this is taxed at the basic rate of 20%.

Luke's entire 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. The lump sum is not added to his other income and therefore it does not push him into the 40% tax bracket. 

When he applies for a state pension lump sum, the Department for Work and Pensions (DWP) (that is, the Pension Service) asks Luke to advise it 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 before it pays it to him. 

Complexities

When thinking about the tax rate payable on a lump sum, you must ignore the 0% rates which are used to tax certain amounts of 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. 

For example, if your total taxable income falls within the basic rate band (even if some of that income is taxed at 0% due to it being taxed at the savings and dividend rates), you will pay tax at 20% on your state pension lump sum.

Example: taxpayer with savings income

Graeme, who is not a Scottish taxpayer, claims a state pension lump sum of £27,500 in 2026/27. His other income for 2026/27 is earnings of £5,500, regular state pension payments of £5,000 and savings interest of £3,000.

So, his taxable income (excluding the state pension lump sum) for 2026/27 is:

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

Next, we work out 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 the basic rate of 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%. However we must ignore the 0% rate for this purpose – if the normal tax rates applied, part of his interest income would be taxed at 20%, so this is the tax rate that is applied to the state pension lump sum. 

  Note: If Graeme had any tax ‘exempt’ income such as savings income from Individual Savings Accounts (ISAs), 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.

Example: taxpayer with dividend income

Debbie, who is not a Scottish taxpayer, claims a state pension lump sum of £20,500 in 2026/27. Her other income for 2026/27 is earnings of £8,500, regular state pension payments of £2,500, savings interest of £6,000 and dividend income of £400.

So, her taxable income (excluding the state pension sum lump) for 2026/27 is:

  • Earnings: £8,500
  • State pension: £2,500
  • Savings interest: £6,000
  • Dividend income: £400
  • Minus: personal allowance: -£12,570
  • Total income less allowances: £4,830

Next, we work out the highest rate of tax payable by Debbie, ignoring special rates for savings income and dividends. Debbie’s taxable income of £4,830 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 the basic rate of 20%. The tax on her lump sum is therefore £20,500 x 20% = £4,100.

The 20% rate applies even though 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 savings band which is taxed at the 0% starting rate (within the basic rate band) and the 0% personal savings allowance (£1,000 within the basic rate band). Her dividend income falls within her 0% dividend allowance of £500. The 0% rates and allowances are ignored for this purpose. 

To work out the tax on a state pension lump sum, we also ignore any allowances and reliefs which are in fact ‘tax reducers’ in the tax calculation, such as the marriage allowance. This because it is the rate of tax that applies which is relevant, not the amount of tax (if any) that is paid.

Word of warning: marriage allowance

You need to understand how the marriage allowance, or transferable tax allowance, works so that you can understand how it affects the tax on state pension lump sums. 

The member of the couple that gives up 10% of their personal allowance (£12,570 in 2026/27) 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 which is 20% of the allowance they receive.

Example: marriage allowance and state pension lump sum

Let’s say that Janet elects to ‘transfer’ 10% of her tax allowance to her husband Bill in 2026/27

Her reduced personal allowance for 2026/27 is £12,570 - £1,260 = £11,310.

If she then claims a state pension lump sum in 2026/27, and if her other taxable income is more than £11,310, she will be a taxpayer. Tax on the lump sum would then be due.

However, Bill’s personal allowance for 2026/27 will stay at £12,570. It does not become £13,830. The 10% that Janet has transferred to him is not added to his own personal allowance. 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 2026/27 and his other taxable income is more than £12,570, tax will be due on the state pension lump sum. He can set his marriage allowance tax credit of £252 against the tax that he owes on his total taxable income. 

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 2026/27 there is no practical effect on the amount of tax Welsh taxpayers have to pay.

Practicalities

Unlike with other payments of state pension, the Pension Service takes tax from the lump sum on making the payment. When you apply for your state pension lump sum you will be asked to declare the highest rate of tax that you expect to pay in the year. The Pension Service will apply that rate of tax to your lump sum. If you don’t tell the Pension Service about your expected tax rate, they will apply the basic rate of 20%. At the end of the tax year the Pension Service will tell HMRC about the state pension lump sum paid to you and the tax that has been deducted.  

As you calculate your expected tax rate 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) may require you to fill in a self assessment tax return to settle the further tax due. 

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 work out the correct tax 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.

Tax year in which the lump sum is taxed

The state pension lump sum is usually taxed in the year in which you stop deferring and decide to claim it (specifically, it is treated as taxable income on the day on which the first state pension 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 due to the time it takes for the Pension Service to process your claim and make the payment.

Example: claiming a deferred state pension close to the end of the tax year

Richard decides to stop deferring his state pension at the end of the 2025/26 tax year and notifies he Pension Service of his claim to the state pension on 3 April 2026. 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 10 April 2026. This means that his lump sum will be taxable in 2026/27 unless he claims to delay receipt of it until 6 April 2027 or later, in which case it will be taxable in 2027/28 (see Delaying receipt of the lump sum below). So even though Richard notified the Pension Service that he wanted to start claiming his state pension in 2025/26, the default tax point for the lump sum is in 2026/27 as this is when the first benefit payment date falls.

Delaying receipt of the lump sum

You can choose to delay payment of the state pension lump sum to the tax year after the one in which you stop deferring the state pension. This may be beneficial if it means that the lump sum will be taxed in the later year when your tax rate is lower. 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. 

If you are thinking of taking a pension lump sum under either the flexible pensions or trivial commutation rules, you need to co-ordinate when this is taken with any state pension deferral planning, as those types of pension lump sums are taxable as ordinary income and might push you into a higher tax rate.

  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.

Example: delaying receiving a state pension lump sum to the next tax year

Matthew lives in England and reached state pension age in February 2016 but continued working up until February 2026. He chose to defer claiming his state pension until he stopped work. From 6 April 2025 to his retirement in February 2026, he earned £18,000 a year so he was a basic rate taxpayer in 2025/26. In 2026/27, however, his only income will be his state pension of £184.90 a week. His 2026/27 income is therefore below his personal allowance of £12,570, meaning he is a non-taxpayer.

Matthew starts taking his weekly state pension from 1 March 2026 but asks the Pension Service to defer payment of his state pension lump sum until the start of the 2026/27 tax year. They pay the lump sum on 10 April 2026. Matthew pays no tax on the lump sum, as he is a non-taxpayer in 2026/27. If he had taken the lump sum in March 2026 when he stopped deferring, he would have paid 20% tax on the lump sum because that was the highest rate of tax he paid on his other income in the year.

Dying before receiving your state pension lump sum

If you die before you claim your pre-2016 deferred state pension, the treatment will depend on whether or not you are married or in a civil partnership on death. 

If you are married or in civil partnership

If you are married or in a civil partnership, the lump sum will usually be paid to your surviving spouse or civil partner and taxed in the manner discussed under the heading Tax on a deceased spouse’s (or civil partner’s) state pension lump sum below.

You can read more about the conditions for inheriting deferred state pension entitlement on GOV.UK.

If you are single

If you were not married or in a civil partnership, and you had not claimed your lump sum before you died, any accrued lump sum is lost and only three months of backdated state pension can be claimed by your personal representatives. 

If you had claimed the lump sum before you died, but it was not yet received, it will be paid to your estate. 

Tax on a deceased spouse’s (or civil partner’s) state pension lump sum

The tax is calculated in accordance with the rules set out above but with reference to your own highest tax rate in the year, not to the rate that would have applied to your deceased partner. The tax 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. 

Interaction with capital gains tax

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 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.

Further information

For more information on deferring the state pension, see Putting off (deferring) claiming the state pension.

The DWP has published a guide on deferring your state pension, which includes information on state pension lump sums and what happens if you die. 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:

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.

Previous
Back to top