Short service refunds of pension contributions

A short service refund lump sum is a return of your own contributions when you leave an occupational pension scheme too early to qualify for preserved benefits. The scheme administrator, not you, is charged tax on it: 20% on the first £20,000 and 50% on anything above, usually deducted before you are paid. That charge claws back the tax relief given when the contributions were made, so there is nothing further to pay and nothing to reclaim, whatever your own tax position.

Who can receive a short service refund?

Pensions law protects early leavers through preservation. A member who leaves pensionable service with at least two years’ qualifying service is entitled to a short service benefit, a preserved pension. From 1 October 2015 section 36 Pensions Act 2014 shortened that period to 30 days where the member’s benefits are entirely money purchase (PTM045000). A member who leaves before qualifying, but after at least three months of pensionable service, must be offered either a refund of their own contributions or a transfer of their rights.

For the payment to be an authorised short service refund lump sum, paragraph 5 Schedule 29 Finance Act 2004 requires all of the following (PTM045000):

• the paying scheme is an occupational pension scheme;
• pensionable service ended before normal pension age and the member is not entitled to a short service benefit under section 71 Pension Schemes Act 1993;
• the member has not previously become entitled to any pension or lump sum from the scheme;
• the payment extinguishes the member’s entitlement to benefits under the scheme (with a limited exception for older protected rights);
• the member is under 75.

Two consequences follow. A member of a purely money purchase scheme who has completed 30 days is entitled to short service benefit, so this refund is only possible for such a member who leaves within the first 30 days and whose scheme rules allow it. And a member who transferred in rights from a personal pension or retirement annuity contract gets short service benefit immediately, so cannot have a refund (PTM045000). Personal pensions and SIPPs cannot pay short service refunds at all.

How much can be refunded?

The refund cannot exceed the total contributions actually paid by the member (paragraph 5(2) Schedule 29). Employer contributions are not part of it. If the scheme rules add investment growth to the refund, the growth can be included in the tax treatment up to the limit of the member’s contributions, and any excess may be a scheme administration member payment (PTM045000).

Interest paid separately, for example because of a delay, is treated differently. If it qualifies as a scheme administration member payment, it is taxable under section 369 Income Tax (Trading and Other Income) Act 2005, is paid without tax deducted, and must be declared by the recipient through Self Assessment or by notifying HMRC (PTM045000).

How is the refund taxed?

Section 205 Finance Act 2004 and the Taxation of Pension Schemes (Rates, etc) Order 2010 (SI 2010/536) set the charge for refunds paid from 2010 to 2011 onwards (PTM045000):

Part of the refund	Rate
First £20,000	20%
Anything above £20,000	50%

The scheme administrator is liable, whether or not the administrator or the recipient is UK resident. Where the scheme rules allow, the administrator deducts the tax from the payment, but the charge is calculated on the gross refund. The administrator reports it on the quarterly Accounting for Tax return, showing the number of members refunded and the tax at each rate (PTM162200).

Why is there no further tax or relief?

PTM045000 explains that the charge reflects the tax relief given on the contributions when they were paid in. It is a final settlement:

• a higher rate or additional rate taxpayer pays nothing more;
• a non taxpayer cannot reclaim any of it;
• the tax deducted cannot be set against tax on other income;
• the refund is not taxed again as part of your income.

It also does not touch the lump sum allowance. The only relevant lump sums for that allowance are pension commencement lump sums, uncrystallised funds pension lump sums and stand alone lump sums (PTM171000).

Whether the flat rate works in your favour depends on how much relief you had. Someone who received 40% relief on contributions and is charged 20% on the refund keeps part of that relief. Someone whose contributions attracted little or no relief still suffers the 20% charge.

What does a refund look like in practice?

Illustration only. Leo joins his employer’s defined benefit scheme, pays £3,600 in contributions and leaves after 15 months. He has no short service benefit, so the scheme offers a refund or a transfer. If he takes the refund, the scheme deducts £720 (20% of £3,600) and pays him £2,880. He has no further tax to pay and cannot claim any of the £720 back.

HMRC’s own example in PTM045000 shows a larger refund of £22,800, including £800 of growth within the member’s contribution limit. The first £20,000 is taxed at 20% (£4,000) and the remaining £2,800 at 50% (£1,400), so the member receives £17,400.

Should I take a refund or a transfer?

PTM045000 notes that a transfer of the member’s accrued rights includes the elements provided by the employer as well as the member’s own contributions. A refund returns only your own money, less tax, and the employer’s share stays behind. A transfer keeps the full value inside the pension system, where it can grow and later produce tax free cash. A refund suits a small amount you would rather have now; a transfer usually preserves more value for anyone who expects to keep saving into pensions. For how pension relief works in the first place, see relevant UK earnings and pension relief.

How is this different from other refunds?

• Refund of excess contributions. Contributions above the amount that can receive tax relief can be returned as a refund of excess contributions lump sum. It is tax free, because no relief was given, and must be paid within six years of the end of the tax year of the contribution (PTM045000).
• Cancellation. Contributions refunded because membership is cancelled within a regulatory cooling off period are dealt with separately under PTM146000.
• Part refunds. Regulation 20 of SI 2009/1171 lets certain schemes whose own rules keep back former protected rights pay a part refund that is still treated as a short service refund lump sum, provided it does not exceed the member’s contributions (PTM045000).

What mistakes come up most often?

• Expecting to reclaim the 20% deduction because your income is low. It is the administrator’s tax, not yours.
• Assuming a money purchase workplace pension will refund contributions after 30 days of membership.
• Paying a refund that exceeds the member’s own contributions. Under regulation 20 the whole part refund then becomes unauthorised, and more generally anything above the limit falls outside the short service treatment; see the unauthorised payments charge.
• Administrators forgetting to report the charge on the Accounting for Tax return for the quarter.
• Taking a refund without comparing it with a transfer that would carry the employer’s contributions.

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Related Accountapedia entries

• Small pension pots lump sums
• How a SIPP is taxed
• Protected tax free cash above 25%
• The lump sum and death benefit allowance
• The pension annual allowance

Sources

• GOV.UK: Manual page PTM045000
• GOV.UK: Manual page PTM162200
• GOV.UK: Manual page PTM171000

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.