Article Will I pay tax on my pension?

Pensions are a tax-efficient way to save long term. When you contribute to your pension, the government gives you tax relief - meaning some of the money that you would have paid in tax can instead go towards your savings for the future.

But, when you start withdrawing from your retirement savings, tax might then apply. All this depends on how much money you’ve saved and how you want to take it. Understanding the rules now can help you avoid getting caught out with a tax charge you weren’t expecting.

This article breaks down the basics to help you gain a clearer understanding.

This information is based on our understanding of current taxation law and HMRC practice, which may change. The value of any tax relief will depend on individual circumstances.

How much tax will I pay on my pension withdrawals?

Any income you receive from a pension is treated like income you’d get from a job. You pay income tax on your pension withdrawals if your total annual ‘non-savings, non-dividend’ income is more than your personal allowance – the amount every person is entitled to earn before they start paying income tax. For the 2025/26 tax year the standard personal allowance is £12,570.¹ If you earn less than this you won’t pay any income tax.

But remember, your total annual non-savings, non-dividend income could include the State Pension, a private pension or workplace pension, earnings from a job or self-employment, income from a rental property and any taxable benefits. So make sure to think about all the ways your income is brought in.

You’ll pay basic rate income tax at 20% on total annual non-savings, non-dividend income between £12,570 and £50,270. Above this threshold you pay a higher rate of 40% – and on income above £125,140, you’ll pay tax at 45%. Also, if your total income is greater than £100,000, then your personal allowance will be reduced by £1 for every £2 of income you earn over £100,000.¹

If you live in Scotland the tax rates and bands are different – find out more on the government’s website.

How much tax will I pay on a lump sum withdrawal?

You’ll usually be able to take up to 25% of your pension pot as a tax-free lump sum. You can do this for multiple pension pots you might have – but the maximum amount of tax-free cash you can withdraw from your pensions in your lifetime is £268,275.² The only exception to this would be if you’d previously applied for protection and were entitled to a higher tax-free lump sum before 6 April 2023.  

Once you have taken the maximum of tax-free lump sum, any lump sums you take out of your pension pot will be classed as part of your income for that year. This means your income may end up in a higher tax band, and you’d pay tax at the higher rate of 40% or more.

Lump sum allowance and the lump sum and death benefit allowance

HMRC place limits on the amount of money you can take tax free from pensions. These limits are measured against allowances used up by lump sums taken during your lifetime and any money paid when you die.

The standard lump sum allowance (LSA) is £268,275 and the standard lump sum and death benefit allowance is £1,073,100. These will reduce each time you take a tax-free lump sum from your pension pot(s).  

Here's a case study to bring it to life

Alfred is 68 and lives in Birmingham. He’s just retired from his job at a housing association where he earned £42,000 a year. He has a single pension pot worth £600,000.

• Alfred wants to take advantage of the 25% tax-free lump sum rule which will allow him to withdraw £150,000 without paying tax.
• Of the remaining £450,000 he has in his pension pot, Alfred would like to use income drawdown to give himself a regular income of £15,000 a year.
• He also receives £11973 from the State Pension and £4,500 annual income from a small piece of land he owns, totaling £16,473. This will give him a total annual income of £31,473 (£15,000 from income drawdown + £16,473 from State Pension/land plus income from property).
• Alfred’s personal allowance means he can receive up to £12,570 each tax year before he has to pay income tax. This means the total income Alfred is taxed on will be £18,903 (£31,473 - £12,570).
• As Alfred pays a 20% basic rate of tax, this means he’ll pay 20% tax on the £18,903 of non-savings, non-dividend income he receives each year above his personal allowance. This equals £3,780. 

^{Improve your pensions know-how}

Pensions can be a useful tool to help you save for a future beyond work. Understanding how your pension is taxed could help you to create a more realistic retirement plan.

You should speak to a financial adviser in the first instance if you need further advice about how your tax could affect your pension. If you don’t have a financial adviser, you can find one in your area by visiting moneyhelper.org.uk/choosing-a-financial-adviser, or contact Origen Financial Services.

Origen Financial Services Ltd is wholly owned by Aegon UK plc but operates independently of us.