When you buy a life annuity with your own money, rather than through a pension scheme, only part of each payment is taxed. Section 717 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) exempts a capital element that represents the return of your purchase price, and the remainder is taxed as savings income. You get the exemption by returning form PLA6 to the annuity provider, which then deducts tax only from the taxable part.

What counts as a purchased life annuity?

Section 423 ITTOIA defines a purchased life annuity as an annuity granted for money or money’s worth in the ordinary course of a business of granting annuities on human life, and payable for a term that ends at a time ascertainable only by reference to the end of a human life. It does not matter that the annuity may in some circumstances end before or after the life.

HMRC’s Insurance Policyholder Taxation Manual at IPTM4210 confirms that the common variations still qualify: an annuity guaranteed to run for a set period even if the annuitant dies early, an annuity that guarantees the purchase price will be returned in full, and a temporary annuity that stops on death or at the end of a fixed period. Payments made under a guarantee after the death are still purchased life annuity payments.

Two products sit outside this regime:

  • Pension annuities. An annuity bought under the rules of a registered pension scheme is taxed as pension income under the Income Tax (Earnings and Pensions) Act 2003, which takes priority under section 366(3) ITTOIA. Every pound of a pension annuity is taxable.
  • Annuities certain. A fixed term annuity with no life contingency is split into capital and interest on first principles, following Perrin v Dickson (1929), rather than under the statutory scheme (IPTM4200).

The boundary turns on why and how the annuity was bought, not on where the cash originally came from. An annuity you choose to buy from an insurer with money you already hold, such as savings or a tax free lump sum already paid out of a pension, is a purchased life annuity. An annuity the pension scheme buys for you under its rules is pension income.

Why is part of each payment tax free?

HMRC explains at IPTM4100 that, commercially, each annuity payment is partly a return of the capital you paid and partly a sum that is, in economic terms, interest. Section 422 ITTOIA charges income tax on purchased life annuity payments, and section 717 then removes the capital part from charge. In broad terms the exempt capital in each payment is the purchase price spread over your expected lifetime, measured using prescribed mortality tables.

How is the capital element calculated?

Section 719 sets two methods, depending on whether the amount of each payment depends only on human life.

Exempt proportion (level, stepped and joint life annuities)

Where both the term and the amount of the payments depend solely on human life, section 720 exempts the same proportion of every payment:

Exempt proportion = annuity payment × purchase price ÷ actuarial value of the annuity payments

The actuarial value is measured at the date the first payment starts to accrue, using the mortality tables prescribed in The Income Tax (Purchased Life Annuities) Regulations 2008 (SI 2008/562), taking the annuitant’s age in whole years and without discounting for the time value of money. If the tables cannot be applied, the Government Actuary certifies the value. IPTM4320 notes that this method also covers stepped annuities and joint annuities that reduce on the first death.

Exempt sum (index linked annuities)

Where the payments can change in an unpredictable way, for example annuities linked to the retail prices index, section 721 exempts a fixed sum from each payment instead: purchase price × 1 ÷ expected term in years × months covered by the payment ÷ 12. If a payment is smaller than the exempt sum, section 719(5) carries the shortfall forward to the next payment.

If the term itself depends on something other than human life, the exempt proportion or sum is whatever is just and reasonable (section 719(8)). In every case the purchase price is the total consideration given, apportioned on a just and reasonable basis if it also bought something else (IPTM4340).

How does this work in practice?

Illustration only. Margaret, aged 70, pays £100,000 for a level single life annuity of £7,500 a year, paid at £625 a month. Suppose the provider’s calculation under the prescribed tables gives an actuarial value of the payments of £125,000.

  • Exempt proportion: £100,000 ÷ £125,000 = 80%.
  • Each £625 payment: £500 is capital and tax free, £125 is taxable.
  • Taxable amount for a full year: £1,500, not £7,500.

If Margaret never returns form PLA6, the whole £7,500 is treated as taxable and tax is deducted from all of it. If her total income is within the basic rate band, the £1,500 taxable element is savings income and can be covered by her Personal Savings Allowance, so she may be able to reclaim the tax deducted.

How do you claim the exemption?

The procedure in SI 2008/562, summarised at IPTM4350, runs as follows:

  1. The provider completes Part A of form PLA6 (or its own equivalent) and sends it to the annuitant in time to be returned before the first payment is due.
  2. Each person entitled to the payments completes Part B. One of them answers the three questions in Part C, about wills and settlements, employment and registered pension schemes, and signs the declaration.
  3. The provider completes Part D, including the exempt amount, and sends the completed form to the annuitant within 30 days of receiving it or of the first payment.
  4. The provider sends a copy to HMRC within 3 months of the first payment.

There is no deadline for the annuitant to return the form, but IPTM4351 is clear that until it is returned the annuity must be treated as having no exempt element. Once it is returned, the provider deducts tax only from the taxable part, and the annuitant can claim back tax overpaid on earlier payments, subject to the normal time limits.

GOV.UK states that tax is usually deducted from life annuity payments at 20%. If your income is below your Personal Allowance you can ask the provider to pay without deduction using form R89 (R86 for a joint life annuity), or reclaim overpaid tax on form R40 within 4 years of the end of the tax year.

Which annuities cannot use the exemption?

Section 718 ITTOIA excludes:

  • annuities bought wholly or partly with premiums that qualified for life assurance premium relief under section 266 of the Income and Corporation Taxes Act 1988;
  • annuities purchased because a will directed it; and
  • annuities purchased to provide an annuity payable under a will or settlement out of the income of property disposed of by it.

Inheriting cash and then choosing to buy an annuity with it is different, because the will did not direct the purchase. The three questions in Part C of form PLA6 exist to test for these exclusions, and IPTM4360 instructs the provider not to calculate an exempt element if any answer is “yes”. IPTM4300 adds that the exemption does not apply where the annuity is a receipt of a trade, and companies are taxed on annuities under the loan relationship rules rather than this scheme.

How is the taxable part taxed and reported?

Section 18 of the Income Tax Act 2007 treats purchased life annuity payments as savings income, except for the annuities excluded by section 718. The taxable element therefore sits in the savings slice of your income, where the Personal Allowance, the starting rate for savings and the Personal Savings Allowance can all apply; see tax on savings interest and the Personal Savings Allowance and how savings and dividend income stack. Higher and additional rate taxpayers pay the extra tax above the amount deducted at source.

Savings rates rise from 6 April 2027 to 22%, 42% and 47%, so the taxable element of these annuities will cost more from the 2027 to 2028 tax year. Annuitants who file returns use the completed PLA6 to report the correct taxable figure (IPTM4350). If you have already reported the full payment, you can correct it; see amending a tax return.

What mistakes are common?

  • Never returning PLA6. The provider has to tax every payment in full until the form comes back.
  • Expecting a capital element on a pension annuity. Scheme pensions and annuities bought under registered pension scheme rules are fully taxable pension income.
  • Mixing up the regimes. Life annuity contracts also fall within the chargeable event rules described in chargeable event gains on life policies (IPTM4220), but the regular payments are taxed under the purchased life annuity rules.
  • Joint annuitants. Each person receiving the payments must complete Part B, even where someone else bought the annuity or it is payable on more than one life.
  • Overlooking exempt awards. IPTM4600 confirms that annuities paid to holders of the Victoria Cross and George Cross, and certain other gallantry awards, are not income at all.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.