Do You Pay Tax on Your Pension?

When you start planning for retirement, one of the most common questions is: Do I pay tax on my pension?

The short answer is: yes, in most cases. However, how much tax you pay depends on the type of pension, how you access it, and your overall income in retirement. Understanding how pension income is taxed can help you make more informed decisions about how and when to draw your pension.

In this guide, we explain how tax works on different types of pensions, what allowances you are entitled to, and how speaking to an adviser can support your planning.

Your Tax-Free Allowance

Everyone in the UK has a Personal Allowance. This is the amount of income you can receive each tax year before any income tax is applied. For the 2025/26 tax year, the standard Personal Allowance is £12,570.

This allowance applies to most forms of income, including pension income, wages, savings interest, and dividends. If your total income in retirement is below this threshold, you will not pay any income tax.

If your income is higher than the Personal Allowance, anything above that amount is taxed at the usual income tax rates.

How Tax Works on Pensions

Pension income is treated like any other income for tax purposes. Once you start drawing from your pensions, your income is taxed in the same way as a salary.

Here is how it typically works:

1. Tax-Free Lump Sum

You can usually take up to 25% of your pension pot as a tax-free lump sum. This can be taken all at once or in stages. The remaining 75% is subject to income tax.

2. Defined Contribution Pensions

If you have a defined contribution pension (such as a workplace or personal pension), you can choose how you take your money. This might be through flexible drawdown, lump sums, or buying an annuity. Income taken, after your tax-free lump sum, is added to your other income and taxed accordingly.

3. Defined Benefit Pensions

Defined benefit pensions (also known as final salary schemes) usually provide a regular, guaranteed income in retirement. This income is taxable in the same way as earnings.

Current Income Tax Bands

For the 2025/26 tax year in England, Wales, and Northern Ireland, the income tax bands are as follows:

• You will pay no tax on income up to £12,570. This is known as your Personal Allowance.

• Income between £12,571 and £50,270 is taxed at 20 percent.

• Income between £50,271 and £125,140 is taxed at 40 percent.

• Income over £125,140 is taxed at 45 percent.

Please note that Scotland uses different tax bands.

Your total pension income, plus any other taxable income you receive, is combined to determine which tax band applies.

Examples:

Example 1
You receive £10,000 a year from your pension and have no other income. Because this is below your Personal Allowance, you will not pay any tax.

Example 2
You receive £20,000 a year from your pension. The first £12,570 is tax-free. The remaining £7,430 is taxed at 20 percent.

Example 3
You take a large one-off withdrawal of £40,000 from your pension in a single tax year. After the tax-free element, the remaining income and if you have additional sources of income this may push you into a higher tax band, meaning some of your income is taxed at 40 percent.

Other Things to Consider:

Tax Codes
Your pension provider applies a tax code, provided by HMRC, to calculate the correct tax on your pension income. If the code is wrong, you may pay too much or too little tax. It’s a good idea to check your tax code if your payments seem too high or too low.

State Pension
The State Pension is also taxable, although it is paid without tax being deducted. If you have other sources of income, HMRC may collect any tax owed on your State Pension from other sources of income through changes to your tax code.

Large Withdrawals
Taking a large lump sum from your pension in one go can increase your total income for that year, possibly pushing you into a higher tax band. You may want to consider spreading withdrawals across different tax years where appropriate.

How an Adviser Can Help

An adviser can support you in understanding your pension tax position and help you avoid unnecessary tax charges. They can:

• Explain how your income will be taxed

• Help you make the most of your allowances

• Suggest withdrawal strategies that align with your goals

• Check for any tax code issues or errors

• Offer guidance on the timing and amount of withdrawals

This support can help you keep more of your money and reduce the risk of unexpected tax bills.

Final Thoughts

In most cases, pension income is taxable. But how much you pay depends on the type of pension you have, how you take it, and how it combines with your other income.

Understanding the basics can help you plan with confidence. And if you are not sure where to start, speaking with an adviser can make things clearer.