How Much Tax Will I Pay on My Pension

How Much Tax Will I Pay on My Pension?

Understanding how your pension is taxed is an important part of retirement planning. While pensions benefit from generous tax relief during your working life, income from pensions is usually taxable once you start drawing it.

This article explains how much tax you may pay on your pension, including State Pension, private pensions, and tax free lump sums, and how to manage your income efficiently in retirement.

Is pension income taxable in the UK?

Yes. Most pension income is subject to income tax in the UK. However, the first 25 percent of your defined contribution pension is usually tax free. After that, any withdrawals are added to your other income and taxed at your marginal rate.

The amount of tax you will pay depends on:

• How much income you receive in total during the tax year

• Your personal allowance

• The type of pension income you are drawing

What is the personal allowance?

The personal allowance is the amount of income you can earn each tax year without paying any income tax. For the 2024 to 2025 tax year, the personal allowance is £12,570.

If your total income is below this amount, you will not pay any income tax. Income above this level is taxed in bands:

• Basic rate: 20 percent on income from £12,571 to £50,270

• Higher rate: 40 percent on income from £50,271 to £125,140

• Additional rate: 45 percent on income over £125,140

These bands apply to all taxable income, including pension income, employment earnings, and investment income.

How is the State Pension taxed?

The State Pension is taxable, but it is not taxed at source. This means no tax is deducted before it is paid to you. Instead, HMRC may adjust your tax code on other income sources, such as a workplace pension or part time job, to collect the tax owed.

For example, if you receive the full new State Pension of about £11,500 per year, and have no other income, you will not pay any tax because you are under the personal allowance. But if you have additional income, you may start paying tax on the combined total.

How are private pensions taxed?

Private pensions include:

• Workplace pensions

• Personal pensions

• Self invested personal pensions (SIPPs)

When you begin to draw money from a private pension:

You can usually take:

• 25 percent of your pension pot tax free

• The remaining 75 percent is taxed as income when you withdraw it

You can take the tax free portion as a single lump sum or in stages, depending on how your pension is set up.

Tax is deducted at source

Pension providers usually deduct tax before paying you. In some cases, especially with your first withdrawal, an emergency tax code may be applied. This can result in too much tax being taken. If that happens, you can claim a refund from HMRC using forms P55, P50Z, or P53Z.

How are annuities taxed?

If you use your pension pot to buy an annuity, the income you receive is taxed in the same way as other pension income.

• 25 percent of your pension pot can be taken tax free before buying the annuity

• The regular annuity payments are fully taxable and paid to you after tax is deducted

What about drawdown?

If you choose flexi access drawdown, you can leave your money invested and take income when you need it. Each withdrawal is split:

• 25 percent tax free

• 75 percent taxable at your income tax rate

Flexible drawdown allows you to control how much income you take each year, which can help manage your tax liability.

How to reduce the amount of tax you pay

Here are a few ways to reduce the tax on your pension:

• Spread your withdrawals across several tax years to stay in a lower tax band

• Take only what you need from your pension, leaving the rest invested

• Make use of your personal savings allowance for interest from savings

• Consider drawing from ISAs first, as they are tax free

Always be careful not to withdraw more than you need, as this could push you into a higher tax bracket.

Final thoughts

Most pension income in the UK is taxable, but how much you pay depends on your total income, your tax code, and how you choose to access your savings. You can usually take 25 percent of your pension pot tax free, but the rest will be taxed as income.

Understanding the tax rules can help you make better decisions and potentially save money in retirement. If you are unsure about the tax on your pension withdrawals, consider using a pension calculator or speaking to a regulated financial adviser.