Please find below the extracts from DWP leaflet - SPD1. The lump sum is not taxable if there is no other liability.
Tax on your lump-sum payment HM Revenue & Customs count lump-sum payments from putting off claiming your State Pension as income for tax purposes as well, but the amount of tax you may have to pay on your lump-sum payment is worked out differently. The lump-sum payment is not added to the rest of your income to work out your total income for tax. Instead, the rate of tax due on your lump-sum payment will be the highest rate of tax that you pay on your other income, and any of the special rates of tax that apply to any savings or dividends you might receive are not counted. ‘Other income’ also includes any weekly State Pension you get once you have started to claim it.
This means that: • if you pay no tax because your other income is less than your personal allowance, you will not pay tax on your lump-sum payment if you pay tax on any part of your other income at 20%, you will pay tax on your lump-sum payment at 20% too, and if you pay tax on any part of your other income at 40%, you will pay tax on your lump-sum payment at 40% too. (These tax rates apply in the tax year 6 April 2008 to 5 April 2009.) Your lump-sum payment will not put you into a higher rate of tax than the rate that already applies to your other income. Also, if you are aged 65 or over, it will not reduce your personal tax allowance which is related to your age.
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Please find below the extracts from DWP leaflet - SPD1. The lump sum is not taxable if there is no other liability.
Tax on your lump-sum payment
HM Revenue & Customs count lump-sum payments from putting off claiming your State Pension as income for tax purposes as well, but the amount of tax you may have to pay on your lump-sum payment is worked out differently. The lump-sum payment is not added to the rest of your income to work out your total income for tax. Instead, the rate of tax due on your lump-sum payment will be the highest rate of tax that you pay on your other income, and any of the special rates of tax that apply to any savings or dividends you might receive are not counted. ‘Other income’ also includes any weekly State Pension you get once you have started to claim it.
This means that: • if you pay no tax because your other income is less than your personal allowance, you will not pay tax on your lump-sum payment if you pay tax on any part of your other income at 20%, you will pay tax on your lump-sum payment at 20% too, and if you pay tax on any part of your other income at 40%, you will pay tax on your lump-sum payment at 40% too.
(These tax rates apply in the tax year 6 April 2008 to 5 April 2009.)
Your lump-sum payment will not put you into a higher rate of tax than the rate that already applies to your other income. Also, if you are aged 65 or over, it will not reduce your personal tax allowance which is related to your age.