Understanding pension tax rules


   5 min read

You may need to pay tax on your retirement income. While we can’t personalise how much that might be, we can give you some general information about how tax works.

Tax free pension allowance

You’re entitled to take up to 25% of your total retirement savings tax free. You can take your savings all in one go or as a series of smaller amounts, with 25% of the amount taken being tax free.

If you take all your tax-free entitlement in one go, you can’t leave your remaining 75% untouched in your plan. You’ll need to either buy a secure income or put the rest of your savings into a plan that offers you flexible access to your money – though you can choose not to take any income from it.

With flexible access, your savings stay invested in your plan. While this means they can continue to grow, it also means they can fall in value. So you could get back less than you started with.

Pension personal allowance

The government allows you to receive a certain level of income each year, without taxing you. It’s called your 'Personal Allowance'.

The standard Personal Allowance is £12,570 and it's predicted to stay this way until April 2028. This can be subject to change.

Any tax-free cash you take doesn’t count towards your Personal Allowance.

Pension tax brackets explained

The table below shows the income tax bands for a UK taxpayer (excluding Scotland*) with the standard Personal Allowance.

Tax bands - Personal allowance up to £12,570 - Basic rate £12,571 to £37,700 - Higher rate £37,701 to £150,000 - Additional rate over £150,000

As you can see, someone with a standard Personal Allowance wouldn’t pay any tax if their total income from all sources during the year was less than £12,570.

The table also highlights how taking large sums of cash from your retirement savings could push you into a higher rate tax bracket – meaning you’d hand more of your savings to the government.

Tax treatment depends on your individual circumstances and can be subject to change.

*If you're a UK taxpayer living in Scotland and you want to find out what income tax rates apply to you, click here.

Make your money work smarter

A financial adviser will be able to give you a personal view of how your retirement income will be taxed. They can look at all the income you have coming in and help you make the most from your tax-free allowances.