How much tax do you pay when you take your pension?
Find out how pension withdrawals are taxed and what it could mean for your money.
How pension withdrawals are taxed
When you take money from your pension savings, the first 25% is usually tax free. The remaining 75% is usually taxable as earned income, just like your salary.
How much tax you pay depends on how you take your money, and whether you have any other income, such as a salary, certain benefits or rental income. Taking a large lump sum in one go could mean part of your income is taxed at a higher rate that year.
Ways to reduce the tax you pay
There’s more than one way to take your pension. With a bit of planning, you can keep more of your savings.
Take smaller amounts to reduce your tax bill
Taking your pension in smaller amounts over time can mean paying less tax. Withdrawing a large amount in one tax year could mean you paying 40% or 45% tax on part of it.
When you take a large lump sum – an example:
You have £40,000 in your pension and decide to take it all in one go:
- The first £10,000 (25%) is tax free.
- The remaining £30,000 is taxable.
- Your personal allowance is £12,570 – the amount you can earn tax free each year.
- That means of the £30,000, £17,430 is taxable income.
You pay £3,486 in tax.
Note: The above figures are based on UK tax bands for the current tax year. They also assume there are no other taxable income.
Emergency tax – why it happens and what to do?
When you make your first pension withdrawal, HMRC may not have given us your tax code yet. In that case, your pension provider will use a temporary code, which can mean paying more tax than you need to.
You can claim a refund from HMRC – and you don’t need to wait for the end of the tax year.
Why taking your pension later could mean paying less tax
You can take your pension from age 55 (57 from April 2028). If you’re still working, you might choose to delay taking your pension. Pension withdrawals count as income, so taking them while you’re still earning a salary could push you into a higher tax bracket. If you wait until after you’ve stopped working to access your pension, you’re more likely to be taxed at a lower rate.
Taking your pension while still working – an example
You’re 60, working full time and earn £45,000 a year. You have pension savings worth £40,000:
- £10,000 (25%) is tax free.
- The remaining £30,000 is taxable income, like your salary.
- Combined with your salary, your total taxable income is £75,000.
- This pushes you into the higher-rate tax bracket, meaning you pay 40% tax on some of your earnings.
Taking your pension after you stop working – an example
You wait until you’ve stopped working and are age 60 before taking your £40,000 pension:
- As before, the first £10,000 (25%) is tax free, and £30,000 is taxable.
- You’re only taxed at the basic rate of 20% – meaning you keep more of your savings.
Annual pension limits and how they affect tax relief
There’s a limit to how much you can save into your pension each tax year and still receive tax relief. This is called the annual allowance, and it’s currently £60,000, or 100% of your earnings – whichever is lower. It includes anything you pay into your pension, along with your employer’s contributions and any tax relief added.
Depending on how you take money from your pension, you could trigger the money purchase annual allowance (MPAA), which reduces your allowance to £10,000 a year.
You’ll trigger the MPAA if you:
- take more than £10,000 from your pension in one go
- take flexible withdrawals that include taxable income
- take lump sums where each withdrawal mixes tax free and taxable income (rather than taking your whole 25% tax-free lump sum upfront).
Once triggered, your allowance reduces to £10,000 a year. This is important to bear in mind if you plan to keep working and contributing to your pension.
There’s also the lump sum allowance, which limits how much you can take tax free across all your pensions.
Find out more on our lump sum allowance page.
