Is an ill health pension taxable? Usually yes: a scheme pension is income, though a serious ill-health lump sum and some injury pensions can be tax-free.
Asking whether you pay tax on ill health retirement is often asking about three payments at once: the monthly pension, a lump sum that may come with it, and, for someone with less than a year to live, a one-off payment of an untouched pot. All three are covered here, then the injury and war pensions that sit outside them. For a free, impartial look at a defined contribution pot, Pension Wise is open to people retiring early because of poor health. Through the form on this page a name and number reach an adviser, FCA-authorised, who rings back; nothing is charged.
Which payment are you asking about?
The general UK position for the 2026/27 tax year; who qualifies is covered in ill health retirement in the UK.
| Payment | Tax position |
|---|---|
| Ill-health pension from a registered pension scheme | Taxable income, normally taxed before it is paid |
| Tax-free cash taken as the pension starts | Tax-free up to a limit; anything above it is taxed |
| Serious ill-health lump sum (life expectancy under a year) | No income tax under 75 within the lump sum and death benefit allowance; taxed above it, and in full from 75 |
| Pension paid outside a registered scheme because of a work or war injury | Can be tax-free in whole or in part; none of it if the same pension would have been paid anyway |
| Armed forces disability pensions for service-related unfitness, Armed Forces Compensation Scheme awards, War Pension | Tax-free (only the disablement part, where only part is certified as due to it) |
Rates below are for England, Wales and Northern Ireland; Scotland sets its own income tax bands.
The pension itself is taxable income
Income tax law charges tax on "pension income", and that includes any pension under a registered pension scheme: sections 566 and 579A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). HMRC's Employment Income Manual confirms that a registered scheme's ill-health pension is taxable, extra pension added because of the ill-health retirement included.
Tax is worked out on total income for the year. GOV.UK gives the standard Personal Allowance as £12,570 for the 2026/27 tax year and a basic rate of 20% on income from £12,571 to £50,270; how pensions are taxed shows how the pieces combine.
Collection is by PAYE. HMRC's Pensions Tax Manual says "PAYE applies to all pensions paid from registered pension schemes", so the scheme normally deducts tax before paying you and sends a P60 after the year ends. Each pension and job can have its own tax code; how a pension tax code works explains the letters, and claiming back overpaid pension tax covers a code that took too much.
Where the ill-health condition is met, payments before normal minimum pension age (55 now, 57 from 6 April 2028) are authorised, so the charges in the early withdrawal penalty guide do not arise.
Tax-free cash when the pension starts
A registered scheme can pay a tax-free lump sum when a pension begins, which HMRC's Pensions Tax Manual calls a pension commencement lump sum. The age test is relaxed: a lump sum paid earlier than usual can count where the pension entitlement arises because the member meets the ill-health condition. It must be paid within an 18-month window, from six months before to twelve months after the pension entitlement begins.
The limit is called the permitted maximum. It is the lowest of three things: the "applicable amount", which in broad terms is 25% of the capital value of the benefits coming into payment, the member's available lump sum allowance, and the available lump sum and death benefit allowance. GOV.UK gives the lump sum allowance as £268,275, and says a protected allowance may raise it. Anything above the limit is taxed as income, deducted by the provider before payment.
A defined contribution pot has a second route: where the ill-health condition is met, an uncrystallised funds pension lump sum can be paid early, taxed in two parts: 25% is tax-free unless it passes the permitted maximum, and the other 75% is taxed like pension income. The allowances are explained in the tax-free lump sum guide and the lump sum and death benefit allowance.
Whether a scheme offers tax-free cash, and how much pension it gives up for it, depends on its own rules. Weighing cash now against a smaller pension for life is where the form on this page may help: it is free, and an adviser who is FCA-authorised will ring to discuss your own figures.
When life expectancy is under a year: the serious ill-health lump sum
This is a lump sum paid, at any age, when a registered medical practitioner's evidence says the member is expected to live for less than one year; it must use up all the untouched rights in that arrangement. Paragraph 4 of Schedule 29 to the Finance Act 2004 defines it, and the ill health retirement guide covers who can get one. Tax turns on age at payment.
- Under 75, within the allowance. HMRC's manual says there is "no charge to income tax" on the lump sum if it does not exceed the permitted maximum. For this payment the permitted maximum is the member's available lump sum and death benefit allowance, which GOV.UK gives as £1,073,100.
- Under 75, above the allowance. The excess is taxed as pension income at the member's marginal rate.
- 75 or over. The whole lump sum "is taxed as pension income (at marginal rates)" of the member, however small it is.
The payer deducts any tax under PAYE. The rule is section 637C of ITEPA, in this form since the 2024-25 tax year, when the lifetime allowance gave way to the two lump sum allowances; older guides describe different limits. Lump sums already taken, such as earlier tax-free cash, use up part of the lump sum and death benefit allowance, while a protection from earlier years can make it larger. In a defined benefit scheme, "it is for the scheme to attribute a capital value" to the pension given up; cashing in a pension because of ill health goes into the choice.
Injury and war-related pensions: when the answer can be no
ITEPA section 644 can exempt part or all of a "disablement pension", one paid because a person left their job through disablement caused by their duties or by war injuries. The test compares it with the pension the same disablement would have brought had it not been work or war related: if none, the whole pension is exempt; if a smaller one, only the extra is tax-free; if the same, none of it is.
The exclusion matters more to most readers: section 644 does not cover a pension to which section 579A applies, and 579A is the section for registered pension schemes. A registered scheme pension stays taxable even where work caused the illness; the exemption is for extra pension paid outside such a scheme.
Armed forces payments come under section 641, which covers listed pensions granted for medical unfitness "attributable to or aggravated by service". HMRC's manual says these "are paid tax-free whether the disability occurred in time of war or peace"; where the Secretary of State certifies a pension as only partly due to disablement, only that part is exempt. A registered Armed Forces Pension Scheme pension is taxed under section 579A. GOV.UK describes the Armed Forces Compensation Scheme lump sum and Guaranteed Income Payment as tax-free, and a War Pension for disablement above 20% as "an ongoing tax free payment". See also whether an armed forces pension is taxable; for a surviving partner, war widow's pension rates and tax on a widow's pension.
Three worked examples, calculated 20 October 2026
Round figures for illustration, using the 2026/27 allowance and basic-rate band above, and assuming England, no other income and an unused lump sum and death benefit allowance.
- The pension. A scheme ill-health pension of £15,000 a year. £15,000 - £12,570 = £2,430 above the allowance, and £2,430 x 20% = £486 tax. £15,000 - £486 = £14,514 a year left, and £486 / 12 = £40.50 a month in tax.
- Tax-free cash. A pot of £80,000, with a quarter taken as tax-free cash: 25% x £80,000 = £20,000. The other £60,000 (£80,000 - £20,000) is taxable when drawn; the allowances are far higher, so they do not bite.
- A serious ill-health lump sum. A member under 75 is paid £400,000. That is less than £1,073,100, so none of it is above the permitted maximum. Had it been £1,200,000, £1,200,000 - £1,073,100 = £126,900 would be taxed as pension income at the member's marginal rate.
A real bill changes with other income, earlier lump sums, a wrong tax code or a Scottish address. GOV.UK has a pension tax checker; the lump sum itself is worked out by the scheme from its own rules.
Questions people ask about tax on ill health retirement
Is the lump sum paid when I retire early through ill health taxable?
It depends which one. Tax-free cash as the pension starts is free of income tax up to the permitted maximum; a serious ill-health lump sum is free of it for a member under 75 within the lump sum and death benefit allowance. Amounts above those limits are taxed, and a serious ill-health lump sum paid at 75 or over is taxed in full.
Is medical retirement tax free?
The retirement is not a tax event; the payments are. A registered scheme pension is taxable, while the lump sums and injury pensions above can be wholly or partly tax-free.
Does an ill health pension affect my benefits?
It can. GOV.UK says income-related benefits "could be affected" if you take your pension early, and that you may be entitled to other benefits after ill health retirement. Benefits alongside ill health retirement goes through them.
Your next step
Your scheme's ill health guide and the payer's tax code come first, with a free Pension Wise appointment for a defined contribution pot. To check pension, lump sum and tax code against one another, the form on this page books you a callback, and the FCA-authorised adviser who phones charges nothing for it.
Sources: HMRC, Pensions Tax Manual PTM062100, PTM063210, PTM063230, PTM063300, PTM063400 and PTM024600; HMRC, Employment Income Manual EIM75080 and EIM75920; Income Tax (Earnings and Pensions) Act 2003 ss566, 579A, 637C, 641 and 644 and Finance Act 2004 Schedule 29 paragraph 4 (legislation.gov.uk); GOV.UK, Tax on your private pension contributions: lump sum allowance; Early retirement, your pension and benefits; Tax when you get a pension; Income Tax rates and Personal Allowances; Income Tax: tax-free and taxable state benefits; Armed Forces Compensation Scheme; War Pension Scheme; MoneyHelper, Pension Wise (archived copy). Read 20 October 2026.