Tax is normally deducted from a small pension lump sum and in many cases you can be due a refund of some or all of the tax taken from your lump sum.
It is common for pension lump sum recipients to be charged at a rate of tax that is higher than it should be resulting in an overpayment of income tax.
From the age of 55 you can access your pension and ask for a lump sum payment with the amount of tax you are charged depending on your circumstances in the tax year it is taken.
Pension providers automatically deduct tax with the responsibility of claiming any overpaid tax back often left with individual taxpayers.
How much tax do I pay on a pension lump sum?
Typically HMRC allows the first 25% of a pension lump sum to be paid free of tax. That leaves the remaining 75% to be taxed accordingly. The rate at which you will pay tax on your lump sum depends on the rate at which you pay income tax.
The pension lump sum is added to your other taxable income which means the rate at which you pay tax can go up because of the pension payment.
Your tax free personal allowance is deducted from your total taxable income (including the pension lump sum) and then you will pay tax at a rate of 20%, 40% or 45%.
Pension lump sum tax free payment
HMRC allows 25% tax free per pension so if you have more than one you will be eligible for 25% tax free from each eligible pension pot.
Sometimes you don’t have to take the first 25% of your pension lump sum all in one go meaning you can spread the payment over different tax years.
How do I claim back tax paid on a pension lump sum?
The way in which you can claim tax back on a pension lump sum is dependent on the type of pension lump sum and your employment status.
HMRC let’s you complete the process online or you can print it off so you can post it to HMRC to the address on the form. To submit your form online you will need to login using your government gateway account.
Form P53 pension lump sum refund:
Form P53 should be used if you have overpaid tax on a small pension lump sum or trivial commutation of a pension fund which applies to small defined benefit schemes.
Form P53Z pension lump sum refund:
If you have flexibly accessed your pension pot and emptied it you should use form P53Z.
Form P53Z should also be used by people who have received a serious ill health lump sum.
Form P55 pension lump sum refund:
Form P55 should be used if you have flexibly accessed only part and not all of your pension pot.
Form P50Z pension lump sum refund:
P50z is for people who have emptied their pension pot flexibly and are not employed.
HMRC will normally send you P800 tax calculation which will detail how much tax you are owed back and let you claim it online through your personal tax account or HMRC app or by cheque through the post.
Pension lump sums and your tax return
If you complete a self assessment tax return you will need to include the taxable element of a pension lump sum on your tax return.
You won’t need to complete any other forms if you complete a tax return with HMRC refunding any tax owed to you after they have processed your self assessment tax return.
