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What is a lump sum?
A lump sum is an amount of money you receive all at once, rather than in smaller instalments.
Where might a lump sum come from?
The scenarios resulting in a lump sum being paid to you can be varied.
You may receive a lump sum:
- as a bonus from your employer
- as a gift from a friend or relative
- when you cash in all or part of a pension
- as a redundancy payout from an employer
- after the sale of a house, car or another asset
- as the result of a lottery, premium bonds or competition win
- when you inherit from the estate of a friend or relative who has passed away.
You can also build a lump sum for yourself by paying into a savings or investment account over time.
Wherever it comes from, a lump sum can give you several opportunities and options.
What could you do with a lump sum?
What you choose to do with your lump sum really depends on your circumstances and needs.
Tackle existing debts
Paying down any overdrafts, loans, credit cards or even making mortgage overpayments.
Spend a portion of your lump sum
For example, you might want to upgrade your car or invest in some home improvements.
Pay money into a savings account
By earning interest, you could start to grow your savings balance. We offer a range of savings options to suit most needs, including cash ISAs, fixed rate and instant access accounts.
Invest money
Investment options include share dealing, Ready-Made Investments and Share Dealing ISAs. Just be aware that the value of and returns you receive from investments can rise and fall. To ride out market fluctuations, investing is best suited to longer-term financial goals.
Paying tax on a lump sum payment
You may need to pay tax on your lump sum, depending on where it came from.
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Payments from an employer are usually taxed at the source. Other forms of income, such as interest earned on personal savings, may not be.
It’s your responsibility to tell HMRC if there any more taxes to pay, so make sure you understand the criteria for self-assessment. HMRC may also contact you with a tax calculation if they think you’ve under or overpaid.
You can find more information on self-assessment on the HMRC website.
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You may be able to take up to 25% as a tax-free lump sum, after which taxes can apply.
You can find more information about what's taxed on a pension on the HMRC website.
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There are instances where you may have to pay Capital Gains Tax on when selling.
- A valuable possession. This usually excludes your primary residence and may also exclude personal vehicles.
- Your primary residence if it’s been let, used as a business premises or is very large.
- Shares that aren’t held in an ISA.
- Cryptoassets, such as bitcoin.
- Business assets.
But you do have an annual tax-free allowance for capital gains.
Capital Gains Tax usually won’t apply to:
- ISAs
- gifts made to a charity
- gifts made to your spouse
- UK government gilts and premium bonds
- prize money, for example, from betting, lottery tickets or raffles.
You can find more information on Capital Gains Tax and allowances on the HMRC website.
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Inheritance tax applies when an estate is valued over the IHT threshold and before assets are distributed to any beneficiaries. IHT can also apply to gifts made by the deceased during their lifetime, depending on tax exemptions and relief.
Legacies to surviving partners, registered charities and selected organisations may be tax free.
It is the responsibility of the administrator or executor of the estate to work out and pay any due tax.
Beneficiaries don’t normally pay tax on anything they inherit once an estate has been settled. But, related taxes may apply – for example, if you invest a lump sum, tax may apply to any interest you earn as a result.
You can find more information on inheritance tax on the HMRC website.
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Depending on your residency status, you may also need to pay UK income tax on foreign income you receive, including any lumps sums.
There's more information on foreign income on the HMRC website.
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Financial Services Compensation Scheme
Eligible deposits held with us are protected up to a total of £85,000 by the Financial Services Compensation Scheme (FSCS), the UK’s deposit guarantee scheme.
