What is the individual's lump sum allowance under ITEPA 2003 section 637P?

Under section 637P of the Income Tax (Earnings and Pensions) Act 2003, every individual has a lump sum allowance of £268,275. This is a fixed statutory amount representing the maximum pension lump sums an individual can receive tax-free over their lifetime, introduced by the Finance Act 2024.

What happens if pension lump sums exceed the £268,275 lump sum allowance?

When the total of an individual's qualifying pension lump sum payments exceeds the £268,275 lump sum allowance, the excess amount becomes subject to income tax. Each lump sum taken is tested against the remaining allowance, and only amounts within the allowance remain tax-free.

Why was the lump sum allowance introduced by the Finance Act 2024?

The lump sum allowance of £268,275 was introduced by the Finance Act 2024 as part of reforms replacing the previous lifetime allowance framework. It effectively caps the total tax-free lump sums an individual can draw from their pension arrangements, simplifying the pension tax charge structure under United Kingdom law.

How is the lump sum allowance used when taking pension commencement lump sums?

When an individual takes a pension commencement lump sum, the amount is deducted from their £268,275 allowance. For example, taking £200,000 leaves £68,275 remaining. Any subsequent qualifying lump sums from other pension arrangements are only tax-free up to that remaining balance.

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

Individual's lump sum allowance

Section 637P establishes the fixed monetary amount that represents an individual's lump sum allowance for pension purposes.

Every individual has a lump sum allowance of £268,275.
This is a fixed statutory amount set by legislation.
The allowance applies to pension lump sum payments that can be taken tax-free.
This provision was introduced by the Finance Act 2024.

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