Tax and pensions
Your pension is one of the most tax-efficient ways to save for retirement in the UK. Contributions usually benefit from tax relief, and any investment growth within your pension is largely free from tax, helping your savings build more effectively over time.
When it comes to understanding tax and your pension, there are three main things you need to know.
- The government gives you tax relief when you contribute to your pension. So if you’re a basic-rate taxpayer, for every £80 you pay in, the government adds £20 too.
- Your pension is invested, and any growth is free from UK income tax and capital gains tax.
- From the age of 55 (rising to 57 from 2028), you can usually take up to 25% of your pension as a tax-free lump sum.
Higher-rate and additional-rate tax relief
If you’re a higher-rate or additional-rate taxpayer, you may be able to claim extra tax relief through your self-assessment tax return. This can make pension contributions an efficient way to reduce your taxable income while increasing your retirement savings.
Find out more about tax relief.
Your annual pension allowance
There are limits to how much you can contribute to your pension each year while still receiving tax relief. Understanding your allowance can help you make the most of pension tax benefits without unexpected tax charges.
- The annual allowance is currently £60,000
- This may be lower if you’re a higher earner (tapered annual allowance)
- You may be able to carry forward unused allowance from previous years
What happens when you access your pension?
When you start taking money from your pension, tax rules change.
- You can usually take up to 25% of your pension as a tax-free lump sum
- Any additional withdrawals are taxed as income at your marginal rate
Taking larger amounts in one go could move you into a higher tax band, so it’s worth thinking about how and when you take your money. Spreading withdrawals over time can help manage your tax position.
Don’t forget - you don’t have to take everything at once, you can access your pension in stages, depending on what works for you.
Understanding your options: crystallised vs uncrystallised funds
When you access your pension, you may come across terms like “crystallised” and “uncrystallised” funds. Understanding the difference can help you make more informed decisions about how and when to access your pension.
What are uncrystallised funds?
Uncrystallised funds are pension savings you haven’t accessed yet.
What are crystallised funds?
Crystallised funds are savings you’ve started to take money from.
Tax when taking your pension
Got questions about tax and your pension? Here are some common questions, along with our answers:
- Do I pay tax on my pension withdrawals?
Yes. Anything above your 25% tax-free amount is taxed as income. - Can I take my pension as a lump sum?
Yes, but taking large lump sums could increase the amount of tax you pay. - Can I reduce tax on my pension withdrawals?
In some cases spreading withdrawals across tax years may help reduce your overall tax bill. - Will my pension affect my tax code?
It can, especially when you first take money, due to emergency tax codes.
Good to know
This information is for guidance purposes only and is not financial advice. If you need financial advice you can locate a regulated financial adviser on the MoneyHelper website. Where we provide links to third-party websites we are not responsible for their content, so it's important for you to carry out your own independent research.
