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Tax on Lump sums

Tax on lump sum payments - 2019/2020 tax year

If you take all or some of your pension pot as a lump sum you wil be paid as follows:

  • 25% of your pension pot will be paid tax-free.
  • The remaining 75% of your pension pot will be taxed at your marginal rate.

For example, if you are a basic rate tax payer:

Pension Lump Sum





Tax Rate

Tax paid

After tax

£ 2,500

25% tax free


£ 2,500

£ 7,500

75% taxed










£ 8,250

However, if you have already taken the 25% tax free sum and you take another cash lump sum you will be taxed at your marginal rate.

Most people expect this to be a simple deduction of 20% for basic rate payers and 40% for higher rate tax payers. But this is not always the case because the way the PAYE system works and your pension provider may deduct emergency tax.

Pension providers must tax ad-hoc cash or your first regular income payments on the month 1 basis if they don’t have an up-to-date tax code for you.

Emergency tax on pension lump sums

Pensions, including lump sums, are paid through the ‘Pay As You Earn’ (PAYE) system. This means any tax payable is deducted before you receive your payment. Under PAYE, any payments you receive will be treated as though they will continue to be paid each month like a regular salary or income.

When you take your first pension payment, an emergency tax rate will be applied unless your pension provider has a current tax code for you.

Emergency tax is a way of ensuring enough tax is being collected because HMRC assume you will be paid this amount every month (even though you know it is only likely to be a one-off payment).

The emergency tax calculation is complicated but it means you will pay more tax on a one-off payment than you should pay.

If you are interested in the detail, your pension provider will apply 1/12th of the personal allowance (£12,500 in 2019/20) to the payment, and will assess the remaining payment against 1/12th of each of the income tax bands currently in force.

The tax code used for emergency tax in the 2019/20 tax year is 1250L/M1. This code assumes you can receive £12,500 a year without deduction of tax, broken down over the year into 12 equal chunks.

It means the first £1,042 (i.e. £12,500 divided by 12) of any taxable payment can be paid tax free; the next £3,125 will be taxed at 20% and the next £9,375 taxed at 40%. Any amount in excess of £13,542 would be taxed at 45%.

Taking the example above, and assuming the 25% tax-free cash sum had already been taken, the tax payable will be as follows:

Pension Lump Sum





Tax rate

Tax paid

After tax




















£ 7,042

But the good news is you can reclaim any overpayment of tax.

Claiming back emergency tax on a pension

Any overpaid tax will normally be recovered through an adjustment to your code for future income payments.

HMRC will issue a revised tax code for the provider to apply to future payments.

However, if you will not be taking any more cash or income later in the year against which the additional tax can be offset you can apply for a tax reclaim.

You have two options – you can wait until the end of the tax year and a tax refund will be created as a result of the information submitted in your tax return or you can reclaim the overpaid tax direct from HMRC immediately by using the appropriate claim form.

If you decide to reclaim any overpaid tax you can ask HMRC for one of the following forms;

  • P50Z form – If you have withdrawn your entire pension and have no other income.
  • P53Z form – If you have withdrawn your entire pension and have other sources of income.
  • P55 form – If you have not withdrawn your entire pension & won’t withdraw further pension income in the current tax year.

For further information you can visit


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