1. What’s taxed and what’s tax-free

Taxed pension income

When you get a pension you pay tax on any income above your tax-free Personal Allowance.

How much Income Tax you pay depends on the tax rate that applies to you.

Your income includes:

  • the State Pension
  • private pensions (workplace, personal, stakeholder)
  • earnings from employment or self employment
  • any taxable benefits you might get
  • any other income, money from investments, property, savings

When you start getting your regular pension payments, eg from an annuity, you’ll have to pay Income Tax on them.

Tax-free pension income

Lump sums

Most pension schemes let you take 25% of your pension pot as a lump sum. This money is tax-free.

Example:
Your pension pot is £60,000, you could take £15,000 without paying Income Tax on it. You then get regular payments from the remaining £45,000. These payments would be taxed.

Taking smaller pension funds as lump sums

You can take a smaller pension fund as lump sum. 25% of it is tax-free.

You can usually qualify to do this if you’re taking:

  • a lump sum worth up to £30,000 from one or more pension pots (sometimes called a ‘trivial commutation’)
  • smaller pots worth up to £10,000 each from workplace pensions
  • up to 3 smaller pots worth up to £10,000 each from personal or stakeholder pensions

However, if you’ve already started drawing a pension from the fund and then decide to take a lump sum, you would be charged 20% tax on the entire amount.

At the end of the tax year you might get a refund or have to pay more tax on the lump sum. This depends on your overall income for the tax year.

Tax-free allowances if you were born before 6 April 1948

You get a higher Personal Allowance.

If you or your spouse or partner were born before 6 April 1935 you might also be able to get Married Couple’s Allowance or Maintenance payments relief for payments to ex-spouses or partners.