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

Uncrystallised funds pension lump sums

Section 637D sets out the income tax treatment of uncrystallised funds pension lump sums paid from registered pension schemes, including the tax-free portion and the cap on the amount that can be paid free of tax.

• 25% of an uncrystallised funds pension lump sum is normally free of income tax, with the remaining 75% taxed as pension income.
• The tax-free element is capped at a "permitted maximum" — if 25% of the lump sum exceeds this cap, the excess is also taxed as pension income.
• The permitted maximum is the lower of the member's available lump sum allowance and their available lump sum and death benefit allowance at the point they become entitled to the lump sum.
• Both allowances are assessed immediately before the member becomes entitled to the lump sum, meaning earlier lump sum payments will have reduced the available amounts.