How tax works on pension income

You usually pay Income Tax on earnings above your Personal Allowance. This includes income from: 

• wages
• profits from self-employment 
• pensions, including the State Pension 
• certain benefits. 

See more examples of the income that countsOpens in a new window on GOV.UK.

For the 2024/25 tax year (6 April to 5 April), the standard Personal Allowance is £12,570. But it might be: 

• £13,830 if you claim the Marriage AllowanceOpens in a new window 
• £15,640 if you claim the Blind Persons AllowanceOpens in a new window 
• between £0 and £12,570 if you earn between £100,000 and £125,140  
• £0 if you earn more than £125,140.

If you have money saved or invested in an ISA, any income you get from it is tax-free.  

You can also earn some tax-free income from other types of savings and investments. This is called the Personal Savings Allowance (PSA) and means each tax year you can usually earn up to: 

• £1,000 if you’re a basic-rate taxpayer 
• £500 if you’re a higher-rate taxpayer 
• £0 if you’re an additional-rate taxpayer.  

If your total income is less than £17,570, you can often earn up to £6,000 from savings or investments without paying tax. This is called the starting rate for savings. 

For more information, including the allowance for dividends and how to pay tax if you go over the limit, see our guide How tax on savings and investments works.

From age 55 (57 from April 2028), you can usually take up to 25% of your pension tax-free – as long as you don’t take more than the lump sum allowance (LSA). 

The LSA is usually £268,275, but it might be higher if you have lifetime allowance protectionOpens in a new window – HMRC should have sent you a certificate telling what your protected allowance is.

You might be able to take more than 25% tax-free if you started your pension before April 2006 and your scheme rules allow it.  

If you have a defined benefit pension (often called a final salary or career average scheme), you can usually take up to 25% as a tax-free lump sum. The rest will be taxable regular income when you take it. 

 If you have a defined contribution pension, you can take up to 25% of your pension as a tax-free lump sum and:  

• leave the rest invested and take taxable income as and when you need it, called pension drawdown 
• get a taxable guaranteed income by buying an annuity 
• take one or more taxable lump sums, with up to 25% of each amount paid tax-free.  

For more information, see our full guide about your pension options, including how each payment might be taxed.  

If you’re aged 50 or over, you can also have a free Pension Wise appointment  to discuss the different ways you’re able to take money from your pension pot. 

If you decide to take your pension as one or more lump sums, at least 75% of each amount will usually be counted as income. This means you might earn enough to move to a higher band of Income Tax.  

You can see the Income Tax bandsOpens in a new window and Scottish Income Tax bandsOpens in a new window on GOV.UK. 

If a lump sum is likely to push you into a higher rate, you could consider spreading your pension payments across multiple tax years to help you pay less tax. 

Taking taxable money from a defined contribution pension might trigger the money purchase annual allowance (MPAA). This includes taking one or more taxable lump sums or taking any taxable income from drawdown.  

Once triggered, the MPAA reduces the amount you can pay into a defined contribution pension and benefit from tax relief to £10,000 a year. This includes tax relief and employer contributions.   

Before taking money from a defined contribution pension, see our guide about the money purchase annual allowance for more information. 

If you decide to take your pension as one or more lump sums, your provider will often use a temporary or emergency tax code for the payment.  

This usually means the lump sum you receive is treated as you receiving this amount every month, so the rate of Income Tax you pay might be higher than it should be.  

For example, if you took a £10,000 lump sum, an emergency tax code will assume your income is now at least £120,000 a year higher. This means you’d pay at least the higher-rate of Income Tax, or the advanced-rate in Scotland.   

See how to reclaim overpaid tax for what to do if you’ve paid too much. 

Income Tax is usually calculated and paid by your pension provider before they pay you any money. Your provider uses your tax code to work out how much tax you’ll pay. 

You can check your tax codeOpens in a new window on GOV.UK and update anything that’s wrong.  

You’ll also need to complete a Self Assessment tax returnOpens in a new window if: 

• you have income from self-employment over £1,000 or 
• your total income is over £150,000.

Income from your State Pension counts as taxable earnings, but it’s paid without tax deducted.

This means any Income Tax you owe is usually paid by your private pension provider, so your other pension income is reduced before you receive it. Your tax code tells your provider how much tax you need to pay.

Example: If you receive £5,000 a year from your private pension and £11,500 from the State Pension, your private pension provider will usually pay any tax you owe on the total £16,500 you receive. 

If you don’t have other sources of income and earn enough to pay tax, you’ll need to pay any tax yourself.

How to do this depends on when you reached your State Pension ageOpens in a new window If it was:

• before 6 April 2016, you’ll have to complete a Self Assessment tax returnOpens in a new window each year
• on or after 6 April 2016, HMRC will send you a tax bill to pay.

You won’t need to pay National Insurance contributions after you reach your State Pension age, unless you’re self-employed – then you’ll need to pay them until the end of that tax year. 

If you’re not getting the full amount of State Pension, check if you can increase your State Pension with voluntary National Insurance contributions.

You can claim your State Pension when you reach your State Pension ageOpens in a new window. But you can boost the amount you get by delaying or stopping your claim.  

You won’t pay any tax on your State Pension while you’re not getting it, which might mean you pay less tax overall if you still have other income like wages. 

When you make or resume your claim, you’ll start paying tax on the increased amount – usually by changing your tax code so any tax owed is taken from your other income. 

You might also have the option to take your delayed weekly payments in one go. The way tax is calculated depends on how long you’ve deferred for. 

If you claim your State Pension within 12 months of reaching your State Pension age, you have the option of taking the money as a lump sum.  This is called a backdated payment.

The money is added to the rest of your income to calculate the rate of Income Tax you’ll pay, in the tax year it was originally due to be paid.

If you reached your State Pension before 6 April 2016 and delay for over a year, you have the option of taking the money as a lump sum.

The whole amount is taxed at the highest rate of Income Tax you’ll normally pay, in the tax year you receive the money.   

For example, if you’re a basic-rate taxpayer your lump sum will be taxed at 20%. If you don’t earn enough to pay Income Tax, your lump sum will be tax-free. 

Find out more in our guide about deferring your State Pension.

Always check you’re paying the correct amount of tax – especially if your income has changed or you receive multiple types.  

You can check you’re paying the right amount of taxOpens in a new window on GOV.UK – including how much you should be paying.  

If you’ve moved overseas, or are planning to, our guide about moving and retiring abroad explains what happens to your pension income. 

If you don’t earn enough to pay Income Tax, you might still find your employer or pension provider takes off amounts as if you do.

This is because your tax-free Personal Allowance is usually allocated to one source of income, such as your job or a pension. 

To stop your other income being taxedOpens in a new window, contact HMRC and ask them to split your Personal Allowance across all your sources of income. You can also reclaim any overpaid tax.

You can claim back any tax you’ve overpaid. HMRC might also pay it back to you automatically at the end of the tax year. 

You can check how to claim a tax refundOpens in a new window on GOV.UK to see what you need to do, including which forms you might need to complete.

If you earn less than £20,000 a year, you can get free help with tax problems: 

• if you’re close to 60 or older, you can contact Tax Help for Older PeopleOpens in a new window 
• if you’re under 60, you can contact TaxAidOpens in a new window – they can help if HMRC is unable to sort your tax issue first. 

The Low Incomes Tax Reform GroupOpens in a new window also has free online guides that anyone can access.