What is the 25% tax-free pension lump sum?
Answered 17 March 2026
Here is a comprehensive explanation of the 25% tax-free pension lump sum:
What the law says
The formal name for the "25% tax-free pension lump sum" is the Pension Commencement Lump Sum (PCLS). Under UK law, registered pension schemes are permitted to pay certain authorised lump sums to members, of which the PCLS is the primary tax-free type.
Tax exemption: Section 637A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) provides that no liability to income tax arises on a pension commencement lump sum paid under a registered pension scheme.
Timing of entitlement: A person becomes entitled to a PCLS immediately before they become entitled to the pension in connection with which it is paid. If the person dies before becoming entitled to that pension, entitlement is deemed to arise immediately before death.
The Lump Sum Allowance: As of 6 April 2024, an individual's lump sum allowance is £268,275 (as set by section 637P ITEPA 2003), unless they hold certain protections. The PCLS is a "relevant lump sum" that counts against this allowance.
HMRC guidance / practice
The 25% principle: The PCLS is generally limited to 25% of the capital value of the pension benefits coming into payment. For a money purchase (defined contribution) scheme, this is effectively 25% of the pension pot. For a defined benefit scheme, the maximum is calculated using the formula: the lump sum cannot exceed one quarter of the total value of benefits crystallised.
Maximum amount: The normal maximum PCLS is the lower of:
- The available portion of the member's lump sum allowance (£268,275 for most people); and
- The applicable amount (broadly 25% of the total value of benefits coming into payment).
Link to pension: The PCLS must be linked to an arising entitlement to a pension benefit. If benefits are taken in stages, a separate PCLS can be paid each time a "slice" of pension benefits is crystallised, provided the conditions are met.
Annuity purchase: Where a lifetime annuity is purchased from uncrystallised funds, the maximum PCLS is one third of the annuity purchase price — which is effectively 25% of the total funds coming into payment.
Pre-6 April 2006 protections: Some members who had the right to a tax-free lump sum of more than 25% before 6 April 2006 may have their entitlement protected (e.g. via primary protection, enhanced protection, or scheme-specific lump sum protection), allowing them to receive a larger tax-free amount.
The 25% in other lump sum contexts: The 25% tax-free principle also applies in related contexts:
- Trivial commutation lump sums: 25% of the value of uncrystallised rights is tax-free; the remaining 75% is taxable as pension income.
- Small pots lump sums: Paid 25% tax-free with the remainder chargeable to income tax as pension income.
- Uncrystallised Funds Pension Lump Sums (UFPLS): Also paid 25% tax-free and 75% taxable as pension income.
Summary
In short, the 25% tax-free pension lump sum is the Pension Commencement Lump Sum (PCLS) — a payment from a registered pension scheme taken when benefits come into payment, which is entirely free of income tax. For most people, the maximum tax-free amount is capped at £268,275 (the lump sum allowance), and the lump sum cannot exceed 25% of the total value of the pension benefits being crystallised.
Citation sources
Karen has a money purchase arrangement with a fund value of £8,000 in a non-occupational pension scheme and wants to access all the funds in the arrangement as a lump sum. As the fund value does not exceed £10,000 Karen can take the whole amount as a ‘small lump sum’ as she meets the necessary conditions for such a lump sum to be paid, providing she has not previously received three such lump sums from non-occupational pension schemes. The lump sum is paid 25% tax free with the remainder of £6,0
Part 4 Pension schemes etc Chapter 3 Payments by registered pension schemes Authorised member payments Lump sum rule 166 1 This is the rule relating to the payment of lump sums by a registered pension scheme to a member of the pension scheme (“the lump sum rule”). Lump sum rule No lump sum may be paid other than— a a pension commencement lump sum, aa a pension commencement excess lump sum, b a serious ill-health lump sum, ba an uncrystallised funds pension lump sum, c a short service refund lump
Paragraph 1, 2 and 3(3) to (5) Schedule 29 Finance Act 2004 Where the contract is purchased from uncrystallised funds, a lump sum paid in connection with the annuity purchase may be paid tax-free if it satisfies the requirements for a pension commencement lump sum. The legislation defines the circumstances where a tax-free lump sum may be paid, and the maximum amount. To be treated as a pension commencement lump sum, the lump sum payable under the scheme must be linked to the arising entitlement
Part 9 Pension income CHAPTER 15A Lump sums under registered pension schemes Allowances Individual’s lump sum allowance 637P An individual’s “lump sum allowance” is £268,275.
Section 637G ITEPA 2003 The tax treatment depends on whether any of the lump sum is paid from uncrystallised rights and whether the member has any individuals lump sum allowance available. Where part or all of the lump sum comes from uncrystallised rights and the member has available lump sum allowance, 25% of the value of the uncrystallised rights is not taxable, whilst the remainder is taxable as pension income. If the member does not have any lump sum allowance available, the full value of th
Paragraphs 24 to 34 schedule 36 Finance Act 2004 Some members, on 5 April 2006, had the right to be paid a tax-free lump sum of more than the permitted maximum for a pension commencement lump sum. The legislation protects the rights to be paid a larger tax-free lump sum by altering the permitted maximum for a pension commencement lump sum. The guidance at PTM063240 does not apply to such lump sum payments, instead see the guidance pages relating to the relevant form of lump sum protection. The f
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