Income Tax (Earnings and Pensions) Act 2003 section 637C

Serious ill-health lump sums

Section 637C sets out the income tax treatment of serious ill-health lump sums paid to members of registered pension schemes, with the tax consequences depending on the member's age and the size of the payment.

• A serious ill-health lump sum paid to a member under 75 is generally free of income tax, provided it does not exceed the member's available lump sum and death benefit allowance.
• If the lump sum paid to a member under 75 exceeds the permitted maximum (the member's remaining lump sum and death benefit allowance), the excess is taxed as pension income.
• The permitted maximum is determined by reference to how much of the member's lump sum and death benefit allowance remains available immediately before they become entitled to the lump sum.
• If the member is aged 75 or over at the time of payment, the entire serious ill-health lump sum is taxed as pension income.