What’s taxed

You pay tax if your total annual income adds up to more than your Personal Allowance. Find out about your Personal Allowance and Income Tax rates.

Your total income could include:

• the State Pension you get (either the basic State Pension or the new State Pension)
• Additional State Pension
• a private pension (workplace or personal) – you can take some of this tax-free
• earnings from employment or self-employment
• any taxable benefits you get
• any other income, such as money from investments, property or savings

You may have to pay Income Tax at a higher rate if you take a large amount from a private pension. You may also owe extra tax at the end of the tax year.

If your private pensions total more than £1,073,100

You usually pay a tax charge if the total value of your private pensions is more than £1,073,100. Your pension provider will take off the charge before you get your payment.

Tax if someone inherits your pension

Other rules apply if someone inherits your State pension or your private pension.

What’s tax-free

You won’t usually pay any tax if your total annual income adds up to less than your Personal Allowance.

Lump sums from your pension

You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum. The tax-free lump sum doesn’t affect your Personal Allowance.

Tax is taken off the remaining amount before you get it.

Example:
Your whole pension is worth £60,000. You take £15,000 tax-free. Your pension provider takes tax off the remaining £45,000.

When you can take your pension depends on your pension’s rules. It’s usually 55 at the earliest.

You might have to pay Income Tax at a higher rate if you take a large amount from your pension. You could also owe extra tax at the end of the tax year.

How you can take your pension

A pension worth up to £10,000

You can usually take any pension worth up to £10,000 in one go. This is called a ‘small pot’ lump sum. If you take this option, 25% is tax-free.

You can usually get:

• up to 3 small pot lump sums from different personal pensions
• unlimited small pot lump sums from different workplace pensions

A pension worth up to £30,000 that includes a defined benefit pension

If you have £30,000 or less in all of your private pensions, you can usually take everything you have in your defined benefit pension or defined contribution pension as a ‘trivial commutation’ lump sum. If you take this option, 25% is tax-free.

If this lump sum is paid from more than one pension, you must:

• have your savings in each scheme valued by the provider on the same day, no more than 3 months before you get the first payment
• get all payments within 12 months of the first payment

If you take payments from a pension before taking the rest as a lump sum, you pay tax on the whole lump sum.

Cash from a defined contribution pension

Check with your provider about how you can take money from a defined contribution pension. You can take:

• all the money built up in your pension as cash – up to 25% is tax-free
• smaller cash sums from your pension – up to 25% of each sum is tax-free

You may have to pay a tax charge on money you put into your pension after you withdraw cash.

If your life expectancy is less than a year

You may be able to take all the money in your pension as a tax-free lump sum, if all of the following apply:

• you’re expected to live less than a year because of serious illness
• you’re under 75
• you don’t have more than the lifetime allowance of £1,073,100 in pension savings

If you’re over 75 you’ll pay Income Tax on the lump sum.

Check with your pension provider. Some pension funds will keep at least 50% of your pension for your spouse or civil partner.

How your tax is paid

If you get the State Pension and a private pension

Your pension provider will take off any tax you owe before they pay you. They’ll also take off any tax you owe on your State Pension.

If you get payments from more than one provider (for example, from a workplace pension and a personal pension), HM Revenue and Customs (HMRC) will ask one of your providers to take the tax off your State Pension.

At the end of the tax year you’ll get a P60 from your pension provider showing how much tax you’ve paid.

If the State Pension is your only income

You’re responsible for paying any tax you owe. Fill in and send a Self Assessment tax return if you owe anything.

If you started getting your pension on or after 6 April 2016, don’t send a tax return. HMRC will write to tell you what you owe and how to pay.

If you continue to work

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

If you’re self-employed you must fill in a Self Assessment tax return at the end of the tax year. You must declare your overall income, including the State Pension and money from private pensions, for example your workplace pension.

If you have other income

You’re responsible for paying any tax you owe on income other than money from your pensions. You might have to fill in a Self Assessment tax return.

You can claim a tax refund if you’ve paid too much tax.

Tax codes

If your income only comes from one source you’ll usually have one tax code.

You can have several tax codes if you have income from more than one source.

You can get your tax code corrected if you think it’s wrong.

Tax when you live abroad

If you live abroad but are classed as a UK resident for tax purposes, you may have to pay UK tax on your pension. The amount you pay depends on your income.

If you’re not a UK resident, you don’t usually pay UK tax on your pension. But you might have to pay tax in the country you live in. There are a few exceptions – for example, UK civil service pensions will always be taxed in the UK.

Double tax

If you live in a country without a ‘double taxation agreement’ with the UK, you might have to pay tax in both countries.

Higher tax on unauthorised payments

You’ll pay up to 55% tax on payments from your pension provider if they make an ‘unauthorised payment’. This is a payment made outside of the government’s tax rules and usually includes:

• any payments before you’re 55 (there are exceptions)
• a ‘trivial commutation’ lump sum of over £30,000
• regular payments into your account after you’ve died

Some companies advertise personal loans or cash advances if you take your pension early. These payments are unauthorised and you have to pay tax on them.