Is an armed forces pension taxable? Tax codes explained

Is my armed forces pension taxable? The monthly pension is, through PAYE; scheme lump sums, the EDP lump sum and service injury awards are tax-free.

Whether an armed forces pension is taxable depends on which payment you mean. The monthly pension counts as income; some lump sums, and anything awarded because service caused an injury or illness, do not. Pension Wise, MoneyHelper's free appointment service, is for UK-based defined contribution pensions, so a forces pension itself is a question for Veterans UK and HMRC. An FCA-authorised adviser can check how a forces pension and lump sum would be taxed for you. Asking for a call-back, which is free, means using the form on this page.

Is my armed forces pension taxable as income?

Yes, in the ordinary case. HMRC's Employment Income Manual says armed forces pension payments that are not covered by an exemption are taxable, and that a payment from one of the Armed Forces Pension Schemes that are registered pension schemes is taxed under section 579A of the Income Tax (Earnings and Pensions) Act 2003. That section applies to "any pension under a registered pension scheme".

Taxable does not mean every pound is taxed. GOV.UK says you pay tax once total annual income is above your Personal Allowance, which is £12,570 as the standard figure for 2026/27. Your forces pension is added to other income, such as the State Pension or earnings, and tax is worked out on the total. Scottish taxpayers use different bands. Whether the State Pension is taxable and how UK pensions are taxed generally cover the rest of that picture.

The AFPS 15 booklet says members make no contributions, so the basic pension raises no question of pension tax relief on money paid in.

Which tax code does an armed forces pension get?

HMRC tells the payer of your pension which tax code to use, and the payer uses that code to work out how much Income Tax to take. Each employment or pension gets a code of its own, GOV.UK adds, so a forces pension and a job or second pension can carry separate ones. HMRC's manual says the payer must apply PAYE before paying a registered scheme pension, so tax is normally taken off before the money reaches your account.

At the end of the tax year the pension provider sends a P60 showing how much tax you have paid. Reading a pension tax code decodes the letters and numbers, and claiming back tax overpaid on a pension covers a code that has taken too much.

Veterans UK also talks about a "pension code", and it is a different thing. Its AFPS 1975 guidance says the amounts of service retired pay, pensions, attributable pensions, gratuities and resettlement grants are shown in the pension code, which is revised annually, and the AFPS 75 booklet points to it for standard pension rates. It is a table of rates, not an HMRC tax code.

A Self Assessment return has to list private pension income, GOV.UK says. Whether you must file one at all turns on your wider income; declaring a pension on a tax return goes through it.

Is the armed forces tax-free lump sum really tax-free?

The scheme booklets describe the lump sums that come with the pension as tax-free, and the amount depends on the scheme you are in. AFPS 75 and AFPS 05 closed to new members in April 2005 and March 2015, but their booklets (cover date July 2020) say a member's pension comes with a lump sum, paid tax-free, worth three times the yearly pension. AFPS 15 works differently. Its booklet (dated May 2023) says it "will not automatically pay you a pension lump sum", but you can create a tax-free one by giving up part of your annual pension, called commutation. It allows up to 25% of your overall pension benefits as a lump sum, at a fixed rate of 12 to 1, so each £1 of annual pension given up buys £12. You choose within the six months before the pension is due, and the choice is final. Which armed forces pension scheme you are in sorts out the scheme question first.

The Resettlement Grant is a separate lump sum. Veterans UK describes it as tax-free and as not a pension, paid to regular service personnel who are not eligible, when they leave, for Early Departure Payment benefits, an immediate pension or an ill-health award.

There is also a ceiling on tax-free cash overall. Tax-free cash from any pension is normally capped at a quarter of what has built up, and GOV.UK puts the overall limit at £268,275 (more for some people with protections), with income tax due on whatever exceeds your allowances. HMRC's Pensions Tax Manual says that as of 6 April 2024 there is no longer lifetime allowance, and the Veterans UK guide to the replacement allowances says most AFPS members will not be affected because the lump sums they can generate are normally lower than the limits. The same guide says the lump sums that count are the automatic one under the older schemes and the commuted one under AFPS 15, and that the Resettlement Grant and Early Departure Payment lump sums are left out. For how the allowances work alongside other pensions, see the lump sum and death benefit allowance, what happened to the lifetime allowance and the maximum tax-free cash from a pension.

If an earlier pension has already used part of your lump sum allowance, the adviser who phones after the enquiry form here can add it all up for nothing.

Early Departure Payment: what is taxed and what is not

An Early Departure Payment (EDP) goes to people who leave the regular forces after a long enough career but before the pension itself starts, and its two parts are taxed differently. The lump sum is tax-free: section 640A of the 2003 Act says no liability to income tax arises on a lump sum provided under a scheme established by the Armed Forces Early Departure Payments Scheme Order 2005, and it names the 2014 Regulations too. The monthly income is taxable, though Veterans UK's 2026 tax factsheet says National Insurance is not normally payable on it.

The booklets give the sizes. Under AFPS 15 the EDP lump sum is 2.25 times your annual deferred pension, and the taxable monthly income is 34% of its value, rising for years served beyond the EDP point. Under AFPS 05 the lump sum is 3 times the annual deferred pension and the taxable monthly income is no less than 50% of it.

The AFPS 15 booklet calls an EDP "not a pension", and says the income stops at State Pension Age, when the deferred pension takes over. A member of AFPS 15 can also give up the whole EDP lump sum to raise the monthly income, which the booklet calls inverse commutation, again decided in the six months before payment. Taking taxable income instead of a tax-free sum is a trade-off that depends on you, and the adviser on the call-back, reached through the enquiry form here, can lay it out for nothing.

Injury awards, war pensions and attributable pensions

Payments made because service caused an injury or illness follow different rules from the service pension. The Armed Forces Compensation Scheme (AFCS) applies where service from 6 April 2005 onward caused the injury, illness or death. GOV.UK says its two main awards are "a tax free lump sum payment for pain and suffering" and a Guaranteed Income Payment, "a tax free, index linked monthly payment". Section 641 of the 2003 Act backs this up by exempting a benefit under the scheme paid by reason of illness or injury, as a lump sum or after service ends.

For service before that date there is the War Pension Scheme. GOV.UK says it pays a gratuity, a tax-free lump sum, for disablement of less than 20%, and for disablement above 20% "an ongoing tax free payment paid weekly or monthly". HMRC's manual says specified disability pensions are paid tax-free whether the disability occurred in time of war or peace.

Retirement for medical reasons lands on either side of the line. Section 641 exempts officers' retired pay and other ranks' disability pensions granted "on account of medical unfitness attributable to or aggravated by service in the armed forces of the Crown". The AFPS 75 booklet says that if ill-health is attributable to service you receive an enhanced tax-free immediate ill-health pension; the AFPS 05 booklet says a pension "paid without deduction for income tax" may be available when a condition is mainly due to or worsened by service. A non-attributable award is different: the AFPS 05 booklet describes a Tier 2 award as a taxable ill-health pension with a tax-free lump sum.

HMRC's manual adds two limits. Where the Secretary of State certifies that a pension is only partly attributable to disability, only that part is tax-free. And someone who retires because their service has ended and later establishes a disability claim keeps a taxable service pension: "the service pension will remain taxable", while the added disability pension is exempt. Tax on an ill health retirement pension goes through the wider ill-health position, and armed forces pension death benefits covers what a family receives.

Five things forces pensioners ask about tax

Do I pay tax on my army pension?

Yes, as a general rule: a standard service pension is taxable income. The tax-free parts are the lump sums described above, the Early Departure Payment lump sum and the compensation awards for injury or illness caused by service.

Is the Resettlement Grant taxable?

No. Veterans UK describes it as a tax-free lump sum for qualifying regular personnel who leave without an Early Departure Payment, an immediate pension or an ill-health award. The Veterans UK guide to the allowances also leaves it out of the lump sums that count against the lump sum allowance.

Can commuting make part of my forces pension tax-free?

In AFPS 15, yes: commuting part of the pension creates a tax-free lump sum in exchange for a permanently smaller pension, and the decision cannot be reversed. The older schemes pay their tax-free lump sum automatically, and injury awards are tax-free because of what caused the injury, not because anyone elects it.

Does my armed forces pension count towards the lifetime allowance?

Not any longer, because the lifetime allowance went on 6 April 2024. Lump sums are tested against the lump sum allowance instead, which GOV.UK gives as £268,275, and Veterans UK says most AFPS members will not be affected.

Is a pension code the same as a tax code?

No. A pension code is the Veterans UK table of AFPS 75 pension rates and related payments, revised each year. A tax code comes from HMRC and tells the payer how much tax to take.

When your payments come from several places

A forces pension, a civilian job and a compensation award each have their own tax rules, so a chat about all three with an FCA-authorised adviser could be worth having. Setting one up needs the form on this page and costs you nothing.

Sources: HMRC, Employment Income Manual EIM75400 and EIM75920, and Pensions Tax Manual PTM063400; Income Tax (Earnings and Pensions) Act 2003 ss579A, 640A and 641 (legislation.gov.uk); GOV.UK pages on Armed Forces Compensation Scheme and War Pension Scheme (both updated 6 November 2025), Armed forces pensions (Veterans UK, updated 27 October 2026), tax codes, lump sum allowance, tax on pensions and income tax rates; Ministry of Defence, Armed Forces Pension Scheme 1975, 2005 and 2015 booklets, the AFPS guide to Lump Sum Allowance and Lump Sum Death Benefit Allowance and the Armed Forces Pension Tax Factsheet (Pension Awareness Week 2026); MoneyHelper, Pension Wise (archived copy). Read 2 November 2026.