How Much Tax Will I Pay on My Pension? UK Guide

Find out how much tax you’ll pay on your pension. Learn about tax-free allowances, income tax bands, and ways to reduce pension tax bills.

When you start withdrawing money from your pension, you may need to pay income tax on some or all of it.

Understanding how pension tax works can help you reduce tax bills and withdraw money more efficiently in retirement.

Do You Pay Tax on Your Pension?

Pension income is taxable in the UK, but there are tax-free allowances:

  1. You can take 25% of your pension tax-free (lump sum or smaller withdrawals).

  2. The remaining 75% is taxed as income at your usual tax rate.

  3. Your State Pension is also taxable, but it is paid before tax is deducted (so you may need to pay tax separately).

How Are Pensions Taxed?

Pensions are taxed like normal income, meaning you only pay tax if your total income exceeds your Personal Allowance.

Income Tax Rates for 2023/24 and 2024/25

  • Up to £12,570 (Personal Allowance): 0% (tax-free)

  • £12,571 - £50,270: 20% (basic rate)

  • £50,271 - £125,140: 40% (higher rate)

  • Over £125,140: 45% (additional rate)

Note: The Personal Allowance reduces if your total income exceeds £100,000.

How Much Tax Will You Pay on Pension Withdrawals?

1. Tax on a Pension Lump Sum

  • You can take 25% of your pension tax-free.

  • The remaining 75% is taxed as income.

  • Large withdrawals may push you into a higher tax bracket, increasing the tax bill.

2. Tax on Pension Drawdown (Regular Withdrawals)

  • If you take smaller amounts (e.g., £10,000 per year), you may stay within lower tax bands.

  • If you have no other income, you may pay little or no tax.

3. Tax on Annuities

  • An annuity provides guaranteed income for life.

  • Income from an annuity is taxed as earnings.

  • If total income stays below £12,570, no tax is due.

How to Reduce Pension Tax Bills

  1. Spread withdrawals over multiple years – Avoid taking large lump sums that push you into a higher tax bracket.

  2. Use ISAs for tax-free withdrawals – ISAs provide tax-free income and can supplement pension income.

  3. Delay pension withdrawals – If possible, keep money invested for longer to grow tax-free.

  4. Maximise Personal Allowance – If you have no other income, you can withdraw £12,570 per year tax-free.

  5. Plan withdrawals carefully – Combining State Pension, personal pensions, and other savings strategically can minimise tax liabilities.

Final Thoughts

The amount of tax you pay on your pension depends on how much you withdraw and your total income. While 25% is tax-free, the rest is taxed as income based on UK tax bands.

To reduce tax bills, consider spreading withdrawals over multiple years, using other tax-efficient savings, and making use of your Personal Allowance.

If you are unsure about the best way to withdraw your pension, speaking to a financial adviser can help you optimise withdrawals and avoid unnecessary tax.