Do I Have to Declare My Pension Lump Sum

Learn whether you need to declare your pension lump sum in the UK. Understand what is tax free, what is taxable, and how HMRC treats lump sum withdrawals.

Do I Have to Declare My Pension Lump Sum?

Taking a lump sum from your pension can be a useful way to access cash in retirement. Many people know that part of their pension can be taken tax free, but there is often confusion about whether lump sums need to be declared for tax purposes.

This article explains when you need to declare your pension lump sum, how much of it is taxable, and what action you may need to take to stay within the rules.

What is a pension lump sum?

A pension lump sum is a one-off withdrawal from your pension pot. This can be:

  • A tax-free lump sum when you first access your pension

  • A flexible lump sum taken from your defined contribution pension

  • A serious ill health lump sum or a small pot lump sum

The rules vary depending on the type of lump sum and your age.

Do I have to declare my tax-free lump sum?

Most people with a defined contribution pension are entitled to take up to 25 percent of their pension pot tax free once they reach age 55.

If you only take the tax-free part, you do not need to declare it on a Self Assessment tax return, and you will not pay income tax on it.

However, your pension provider will still report it to HM Revenue and Customs (HMRC) as part of their routine reporting. This does not mean it is taxable.

What if I take more than 25 percent?

If you take more than 25 percent of your pension as a lump sum, the remainder is treated as taxable income and is subject to income tax at your marginal rate.

This portion must be declared if:

  • You are required to complete a Self Assessment tax return

  • You receive a P45 or P60 from your pension provider showing the lump sum and tax deducted

  • HMRC sends you a notice to file a return

If you do not normally complete a tax return, HMRC may adjust your tax code to collect the tax through another income source such as a workplace pension or part-time job.

What about small pot lump sums?

You can usually take a small pension pot of less than £10,000 in full. You are allowed to do this up to three times from different pension schemes.

In this case:

  • 25 percent is tax free

  • 75 percent is taxable and may be deducted by the provider

  • You may need to declare it depending on your total income for the tax year

If too much or too little tax has been paid, you can reclaim or settle the difference through HMRC.

How are lump sums taxed?

When you take a taxable lump sum, your pension provider may apply an emergency tax code. This can lead to more tax being deducted than necessary, especially if it is your first withdrawal in a tax year.

If you overpay tax on your lump sum, you can:

  • Complete form P55, P53Z, or P50Z depending on your situation

  • Or wait for HMRC to issue a refund after the end of the tax year

You may also need to declare the lump sum on your tax return if you complete one for other reasons.

What about defined benefit pensions?

Defined benefit schemes may include a lump sum, often based on your final salary and length of service. In many cases, this lump sum is automatically tax free and does not need to be declared.

If you choose to take a larger lump sum in exchange for a reduced pension, the additional amount may still be tax free up to your limit.

If you exceed your lifetime allowance (abolished in April 2024), different rules now apply, but there are still limits on how much tax-free lump sum you can take.

Do lump sums affect my personal allowance?

Only the taxable portion of your lump sum counts as income and affects your personal allowance.

For the 2024 to 2025 tax year, the personal allowance is £12,570. If your total income including pension lump sums exceeds this amount, you will pay income tax on the portion above the threshold.

Final thoughts

You do not have to declare the tax-free 25 percent of your pension lump sum, as long as you remain within your allowance. However, if you take more than 25 percent or multiple lump sums, the taxable amount must be declared in some cases and may impact your overall tax position.

Always check your payslip or tax code, and if in doubt, contact HMRC or a financial adviser. Understanding your tax responsibilities can help you avoid overpaying or underpaying, and ensure you get the most from your pension.