Tax you pay on your pension

When you take money from your pension pot, 25% is tax free. You pay Income Tax on the other 75%.

Your tax-free amount doesn’t use up any of your Personal Allowance – the amount of income you don’t have to pay tax on. The standard Personal Allowance is £11,000.

The amount of tax you pay depends on your total income for the year and your tax rate.

How each pension option is taxed

This table gives an overview of how much tax you may pay on the money you take from your pension pot.

The pension options What’s tax free What’s taxable
Leave your pot untouched Your whole pot while it stays untouched Nothing while your pot stays untouched
Guaranteed income (annuity) 25% of your pot before you buy an annuity Income from the annuity
Adjustable income 25% of your pot before you invest in an adjustable income Income you get from your investment
Take cash in chunks 25% of each amount you take out 75% of each amount you take out
Take your whole pot in one go 25% of your whole pot 75% of your whole pot
Mix your options Depends on the options you mix Depends on the options you mix

Other tax you could pay

You could also pay Income Tax on:

  • your State Pension
  • earnings from employment or self-employment
  • any other income, eg money from rental income, savings, investments
  • any taxable benefits you might get, eg Carer’s Allowance

The 25% tax-free amount

There are 2 ways you can take your tax-free amount.

Take it all in one go

You can take 25% as a lump sum without paying tax. If you do this, you can’t leave the remaining 75% untouched. You must either:

  • buy a guaranteed income (annuity)
  • get an adjustable income (flexi-access drawdown)
  • take the whole pot as cash

Example Your pot is £60,000 and you take £15,000 – this is your tax-free lump sum. You buy an annuity with the remaining £45,000 which pays you £2,000 a year. This money is taxable.

Take it in chunks

You can take smaller cash sums from your pension pot without paying tax. 25% of each chunk is tax free.

Example Your pot is £60,000 and you take £1,000 every month – £250 of this is tax free. The remaining £750 is taxable.

How your tax is paid

Money you take from your pot comes from your provider with the tax already taken off.

Your provider will also take off any tax due on your State Pension.

You may pay emergency tax when you take money from your pot. You can claim this back from HM Revenue and Customs.

If you continue to work

Your employer will take any tax you owe off your earnings and your State Pension. This is called Pay As You Earn (PAYE).

If your total income (including money from pensions and PAYE) is £100,000 or more for the tax year, or if you’re self-employed, you’ll have to fill in a Self-Assessment tax return.

If you have other income

You’re responsible for paying tax on other income you have, eg from property or investments, and you might have to fill in a Self-Assessment tax return.

You usually pay tax if your pension pots are worth more than the lifetime allowance. This is currently £1 million.