In short, if you don’t understand the HMRC tax rules, you could pay more than you need to.
This guide breaks down how State and private pensions are taxed, when you can take money tax-free, and what happens if you live abroad or pass your pension on.
What income counts for Pension Tax?
Question: Which pensions and income are taxed?
Answer:
“You pay tax if your total annual income adds up to more than your Personal Allowance, says gov.uk.
This includes:
- State Pension (basic or new)
- Additional State Pension
- Private pensions (workplace or personal) — some tax-free
- Employment or self-employment earnings
- Taxable benefits
- Other income such as investments, property, or savings
Your Personal Allowance is usually £12,570. Income below this is normally tax-free.
Can I take any of my pension tax-free?
Question: What pension income is tax-free?
Answer:
- You do not usually pay tax if your total income is below your Personal Allowance.
- Up to 25% of any pension pot can be taken as a tax-free lump sum, with a maximum of £268,275.
Example:
“Your whole pension is worth £60,000. You take £15,000 tax-free. Your pension provider will then take off the tax from the remaining £45,000.”
Special cases:
- Small pots: Up to £10,000 lump sum — 25% tax-free.
- Trivial commutation: Total private pensions £30,000 or less, take it all — 25% tax-free.
- Serious illness: Life expectancy under one year, may take the whole pot tax-free if under 75 and within allowance.
Find out more about individual lump sum allowances
How is pension tax collected?
Question: Who takes the tax?
Answer:
“Your private pension provider will usually take off any tax you owe before they pay you,” says gov.uk.
- State Pension only: HMRC may send a Simple Assessment.
- Pension plus working income: Tax usually handled via payroll.
- Other untaxed income: You may need Self Assessment.
Recommended reading:
What happens if I live abroad?
Question: Will my pension be taxed if I retire abroad?
Answer: It depends on your residency and any double taxation treaties with the country you move to.
What If I Take a Large Lump Sum?
Question: Can I be taxed more if I withdraw a big amount?
Answer: Yes. Taking amounts over your allowance may trigger higher-rate Income Tax. Find out about lump sum charges and allowances on on the gov.uk website
What about inherited pensions?
Question: How is a pension taxed if someone inherits it?
Answer: Different rules apply to State and private pensions. Beneficiaries should check the tax treatment because there are different rules if someone inherits your pension
- Know your total income — that’s what determines tax.
- Up to 25% of pensions can be tax-free. Check your allowances.
- Small pots, trivial commutation, and serious illness have special rules.
