As you will all know, the new tax year recently began and if you’re leaving the Armed Forces, you may well be thinking about how your tax affairs will work
You may be leaving the Armed Forces intending:
- Not to work, relying instead on your Armed Forces pension or Early Departure Payment (EDP)
- To work as an employee but you have no pension or EDP income in payment;
- To work as an employee and you have pension and/or EDP income; or
- To be self-employed.
Whichever group you fall into, the following captures the basics that you need to understand about tax.
Pensions and EDP income count as ‘earned income’ – they are normally taxable but National Insurance Contributions (NICs) are not due in respect of them.
The only time that the pension becomes tax-free is in the event of a medical discharge where the Principal Invaliding Condition* giving rise to the discharge is due to service AND attracts a Guaranteed Income Payment from the Armed Forces Compensation Scheme or a War Pension.
| Tax rates for 2026/2027 are as follows: | Tax rates for Scotland are slightly different: |
| Personal Allowance: £0 to £12,570 (0% tax). | Starter Rate (19%): £12,571 to £16,537 |
| Basic Rate: £12,571 to £50,270 (20% tax). | Basic Rate (20%): £16,538 to £29,526 |
| Higher Rate: £50,271 to £125,140 (40% tax)* | Intermediate Rate (21%): £29,527 to £43,662 |
| Additional Rate: Above £125,140 (45% tax) | Higher Rate (42%): £43,663 to £75,000. |
| Advanced Rate (45%): £75,001 to £125,140* | |
| Top Rate (48%): Above £125,140 |
*If you earn more than £100,000 Your personal allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £125,140 or above. The band assessed as ‘zero’ is your tax allowance. You are only allowed one tax allowance and, normally, it goes against your pay.
Your tax office in respect of your pension/EDP income is:
HMRC, Tŷ William Morgan, 6 Central Square, Cardiff, CF10 1EP. Tel: 0300 200 3300
If you have both pay and pension/EDP income, you need to either:
- Contact HMRC to notify them of income from these separate sources. HMRC should then issue the employer with the correct tax code, thus ensuring that you are correctly taxed; or
- If you don’t involve HMRC, work out for yourself what you will owe over and above what your employer is deducting… and put money aside monthly so that you have it when the tax bill lands on your doorstep. All you need to do then is to be disciplined enough not to use it for other purposes!
We recommend a) as the safest bet and the following illustrates the impact of getting it wrong:
Alex leaves the Armed Forces with a pension of £14,000 and EDP income of £2,000. They live in Sheffield and land a job with a salary of £45,000. That means their total ‘earned income’ is £61,000. Their tax allowance is on their pay but they have not told their employer how much pension they are receiving. They live in England so will pay the following in tax:
20% of the pension/EDP income = £3,200
20% of £32,430 = £6,486 (£45,000-£12,570 tax allowance = £32,430)
Total = £9,686
BUT what Alex should have paid is:
Nothing on the first £12,570 = £0
20% of the next £37,700 = £7,540
40% of the balance (£ 10,730) = £4,292
Total = £11,832
If Alex had been given the correct tax code, the right amount of tax would have been deducted once they reached the 40% tax band. Because this did not happen, they have underpaid £2,146 in tax. HMRC will contact them about paying this amount.
Living abroad
Some of you may be intending to live abroad and will be wondering what happens in relation to income tax if you do so. Armed Forces pensions are normally taxable in the UK, even if you are paying other tax abroad. If your pension is being taxed in UK, in order to prevent your money from being taxed twice, visit Tax Treaties and arm yourself with a copy of any Double Taxation Agreement which exists between the UK and your new country of residence – then make sure your accountant in your chosen country is aware of it.
There are some countries in which you can choose to have your pension taxed under the local tax regime – eg. Nepal or the Channel Islands – and there are others that insist on the tax being paid in the country of residence– eg. Australia and Canada. Wherever you are going to live, go armed with the latest information at Tax on Income Living Abroad – and remember that tax rules do not remain static!
Notes:
*A Principal Invaliding Condition (PIC) is the main injury or illness identified as the primary reason for a service member’s permanent medical discharge from the UK Armed Forces. This condition is officially documented on a medical discharge certificate and is critical for determining the type of pension and compensation benefits a person receives.
