Are you wondering how much you can take from your pension as a tax-free lump sum? The answer depends on several factors, including whether you have any protected allowances.
Standard Tax-Free Lump Sum Allowance:
Generally, you can take a tax-free lump sum from your pension of 25% of your pension pot, up to a maximum across all your arrangements of £268,275. This is your standard lump sum allowance.
Enhanced Tax-Free Lump Sum Allowance:
If you have protected allowances, the amount of tax-free lump sum you can take may be higher. Here’s a breakdown of the different types of protected allowances and the corresponding tax-free lump sum allowances:
Enhanced Protection:
- Enhanced protection with lump sum protection: You can take a tax-free lump sum at the value of the protected percentage of your pension pots on 5 April 2023. For example, if you hold enhanced protection with lump sum protection of 40% and the value of your pension pots on 5 April 2023 is £1,600,000, you are entitled to a tax-free lump sum of up to £640,000.
- Enhanced protection without lump sum protection: You are entitled to a tax-free lump sum of up to £375,000.
Primary Protection:
- Primary protection with lump sum protection: You are protected at the value of the lump sum protection stated on your protection certificate.
- Primary protection without lump sum protection: You have protection of your lump sum allowance at 25% of your pension pot, up to a maximum of £375,000.
Fixed Protection:
- Fixed protection: You are entitled to a tax-free lump sum of up to £450,000.
- Fixed protection 2014: You are entitled to a tax-free lump sum of up to £375,000.
- Fixed protection 2016: You are entitled to a tax-free lump sum of up to £312,500.
Individual Protection:
- Individual protection 2014: You are entitled to a tax-free lump sum of the lower of:
- 25% of the value of all your pension pots on 5 April 2014 (previously known as your protected amount)
- £375,000
- Individual protection 2016: You are entitled to a tax-free lump sum of the lower of:
- 25% of the value of all your pension pots on 5 April 2016 (previously known as your protected amount)
- £312,500
Enhancement Factor:
If you hold a valid enhancement factor that is valid on or before 5 April 2024, you may have entitlement to higher allowances.
- Pre-commencement pension credit rights: Your lump sum allowance will be 25% of your pension pot, up to a maximum of £375,000.
- Other enhancements: Your lump sum and death benefit allowance will be equal to £1,073,100 plus the value of your enhancement factor against £1,073,100.
Important Considerations:
- You can only take a maximum of 25% of your pension pot, even if you have a higher amount of tax-free lump sum available.
- Any lump sums taken above this amount will be taxed at your marginal rate.
- You should inform your pension schemes about any protected allowances you hold.
The maximum tax-free lump sum you can take from your pension depends on whether you have protected allowances and the type of protection you hold. Be sure to check your protection certificate or contact your pension provider for more information.
A lifetime tax-free cap of €200,000 is available for retirement lump sum payments from all sources. The difference between 20%E2%82%AC200,001% and 20%E2%82%AC500,000% is taxable at the standard 20% tax rate. Any amount exceeding 20%E2%82%AC500,000 is subject to taxation under Pay As You Earn (PAYE) at the marginal tax rate of 40%.
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A maximum cap of £268,275 (or 25% of the current lifetime allowance) has been set by the government.
Some people have lump sums that are tax-free up to their lifetime allowance (LTA), after which any amount taken exceeds the LTA is subject to a 55% tax.
The lifetime allowance was eliminated by the chancellor in his Spring Budget, capping the amount savers can access through the pension tax-free lump sum at £268,275.
But those who already have a legally protected right to receive a larger tax-free lump sum will still be able to do so.
Currently, 25% of an individual’s available lifetime allowance at the time the lump sum is taken is the maximum amount that most savers can claim as a pension commencement lump sum.
How Pension Tax free cash works – new lump sum allowance explained
FAQ
How much lump sum can you take tax free?
How do I avoid taxes on lump sum payout?
How much tax will be taken for a lump sum payout?
What is the maximum TFC?
How much tax-free lump sum can I take?
From 6 April 2023, the amount of tax-free lump sum you can take is 25% of your pension pot, up to a maximum of 25% of the standard lifetime allowance. The current lifetime allowance is £1,073,100. If you hold certain lifetime allowance protections, the amount of tax-free lump sum you can take may be higher.
What is a tax free lump sum?
There is a maximum amount that can be taken as a tax free lump sum which is set by HM Revenue and Customs, which is 25 per cent of the capital value of your pension benefits or if lower, 25 per cent of your remaining lifetime allowance. For every £1 of pension you exchange you then receive £12 as a tax free lump sum.
Are lump sum benefits tax-free?
You are entitled to a tax-free lump sum equivalent up to 25% of the capital value of your benefits (limited to £268,275 or 25% of your protected amount if greater). Lump sum benefits up to this level are tax-free.
Does a tax-free lump sum affect my personal allowance?
The tax-free lump sum doesn’t affect your Personal Allowance. Tax is taken off the remaining amount before you get it. Your whole pension is worth £60,000. You take £15,000 tax-free. Your pension provider takes tax off the remaining £45,000. When you can take your pension depends on your pension’s rules. It’s usually 55 at the earliest.