How Much Tax Will I Pay on My Pension?
Quick Answer
Up to 25% of your pension pot can usually be taken tax-free (up to £268,275). The remaining 75% is taxed as normal income at your marginal rate when withdrawn.
The 25% Tax-Free Lump Sum
Most pensions let you take up to 25% as a tax-free lump sum, subject to the Lump Sum Allowance (£268,275 for most people). You can often choose to take this all at once or in stages, depending on how you access your pension.
How the Rest Is Taxed
Anything beyond the tax-free portion is added to your other income for the tax year and taxed at your normal Income Tax rates — 20% within the basic rate band, 40% within the higher rate band, and 45% within the additional rate band.
Emergency Tax on Pension Withdrawals
A first flexible withdrawal is often taxed on an emergency, non-cumulative basis, which can significantly overtax you in that month. Overpaid tax can usually be reclaimed from HMRC, often within a few weeks via an online reclaim form.
Worked Example
You withdraw £40,000 from your pension in one tax year, with no other income. The first £10,000 (25%) is tax-free. Of the remaining £30,000, the first £12,570 uses your Personal Allowance tax-free, and the rest is taxed at 20% within the basic rate band.