Are armed forces pensions taxable?

The short answer

Your armed forces pension, once it is in payment, is taxable. It is treated as income and taxed at your normal rate through PAYE, exactly like a salary or any other pension, so the tax is usually taken before the money reaches your bank account. What is not taxed is most of the cash that comes alongside it: the lump sums are tax-free, and the separate compensation schemes are tax-free too.

So the useful way to think about it is not pension versus no tax, but income versus lump sum. The regular monthly pension is the taxable part. The one-off lump sums, and anything paid as compensation for injury or illness, are where the tax-free treatment sits. The table below sorts the common payments.

Your pension is taxed as income

The AFPS schemes are registered pension schemes, so your pension is taxed as income under the normal pension tax rules. It is added to your other income for the year, and you pay tax at whatever rate that puts you in, 20%, 40% or 45%, after your personal allowance. If the forces pension is your only income and it sits below the personal allowance, you may pay no tax at all.

The tax is collected through PAYE, using a tax code, in the same way an employer would run it. Equiniti (Paymaster), which pays most armed forces pensions, applies the code HMRC gives them and sends you a P60 each year. If your code looks wrong, for example after you start a civilian job or begin drawing the State Pension, it is HMRC you contact to fix it, not the scheme.

One thing you do not pay on a pension is National Insurance. National Insurance is only charged on earnings from work, so once you are drawing a pension rather than earning a wage, there is none to find. That is part of why a pound of pension tends to go further than a pound of salary.

The tax-free lump sums

The lump sums are where the tax-free treatment lives. AFPS 75 and AFPS 05 pay an automatic lump sum of three times your annual pension, and it is free of Income Tax. On AFPS 15 there is no automatic lump sum, but if you commute part of your pension for cash, up to a quarter at a fixed rate, that commutation lump sum is tax-free as well.

The Resettlement Grant, paid to some leavers who do not yet qualify for an immediate pension or EDP, is also a tax-free lump sum rather than a pension. And if you leave on an Early Departure Payment, the EDP lump sum is tax-free even though the monthly EDP income is taxed.

There is an upper limit on tax-free cash, but it is a generous one. Since April 2024 the old Lifetime Allowance has gone, replaced by a Lump Sum Allowance of £268,275 that caps the total tax-free cash you can take across all your pensions. The vast majority of armed forces members are comfortably under it, but if you have other large pensions as well it is worth checking. Our lump sum allowance guide covers how it works.

Early Departure Payment and early leavers

Early Departure Payments are for people who leave before pension age with enough service to qualify, and they split into two parts for tax. The monthly EDP income is taxable, taxed through PAYE like the pension it bridges you toward. The EDP lump sum, paid when you leave, is tax-free.

So an early leaver typically keeps the whole lump sum but pays tax on the income stream at their marginal rate. That matters if you go straight into a well paid civilian job, because the EDP income stacks on top of your new salary and can be taxed at a higher rate than you expect. Our Early Departure Payment guide explains how the payments are worked out.

War Pension and AFCS are tax-free

The compensation schemes sit outside the income tax net entirely, because they are paid for injury or illness caused by service, not for your length of service. Payments under the War Pension Scheme are tax-free. Under the Armed Forces Compensation Scheme (AFCS), both the lump sum and the Guaranteed Income Payment are tax-free.

The same logic covers a service-attributable pension. If you are invalided out and awarded a pension because of a disability caused by your service, that disability pension is tax-free. Where someone receives both an ordinary service pension and a separate disability element, only the disability element is exempt unless they were invalided out, in which case the combined award is treated as tax-free. If any of this applies to you, confirm the split with Veterans UK.

The State Pension is taxable too

The State Pension is taxable, and people are often surprised by that, because no tax is taken off it before it is paid. The Department for Work and Pensions pays it gross. HMRC then collects any tax due on it, usually by reducing the tax code on another income source, most often your armed forces pension.

That is why your forces pension code can change the year you reach State Pension age, and why the tax taken from it can rise even though the pension itself has not. Nothing has gone wrong; HMRC is simply collecting the tax on your State Pension through the code on the forces pension. Our pension and State Pension guide goes into how the two fit together.

If you live abroad

Retiring overseas does not usually turn an armed forces pension tax-free. It is a Crown pension, and Crown pensions are generally taxable in the UK wherever you live, so it typically stays within the UK tax system even after you have left the country.

What can change is where you actually pay. The UK has double-taxation agreements with many countries, and the specific agreement decides whether a Crown pension is taxed only in the UK or can be taxed in your new country of residence, so you are not taxed twice on the same money. The detail varies country by country, so if you are moving abroad it is worth reading the relevant agreement or taking advice before you assume anything about your tax.

Annual Allowance, Lump Sum Allowance and McCloud

Two allowances can bring tax into the picture while you are still building the pension rather than drawing it. The Annual Allowance caps how much your pension can grow in value in a tax year before a charge applies, and it catches more members than expected after a promotion or a sharp pay rise. The Lump Sum Allowance, covered above, caps total tax-free cash.

The McCloud remedy adds a wrinkle here, because recalculating your 2015 to 2022 service can change your Annual Allowance position for those years. If a charge is due you can often have the scheme pay it through Scheme Pays, and the mandatory Scheme Pays deadline for remedy cases has been extended to 6 July 2027. Our Annual Allowance guide and McCloud remedy guide cover both in detail.

How to check your own tax

To see your own position, start with the documents you already get. Your P60 from Equiniti shows the pension paid and the tax taken each year, and your tax code tells you how HMRC is treating your allowances and any State Pension. If the code looks off, particularly after a job change or reaching State Pension age, contact HMRC to correct it rather than the scheme, because the scheme only applies the code it is given.

For anything beyond the basics, such as an Annual Allowance charge, a move abroad, or how a large lump sum interacts with the rest of your finances, take regulated advice. This is an independent education site, not affiliated with the MOD, Veterans UK, JPAC or HMRC, and it provides general information rather than regulated tax or financial advice. The binding position on your tax comes from HMRC, and on your pension from Veterans UK.