Tax and your retirement

When you start to take your pension, you may still need to pay tax. Your State Pension, any other income you receive, and interest from some savings and investments could all be considered taxable.

You can usually take up to 25% of your pension pot as tax-free cash, either as a lump sum or in stages.

If you take more than your tax-free cash, you might have to pay tax on the extra. This could mean that you pay tax at a higher rate than you normally do and in some instances, this could be as much as 45%.

How does the way I take my pension affect the tax I pay?

The income tax bands for the tax year 2018/19 are shown below. These are set by the Government and change every year.

x
Tax band for 2018/19 Taxable income Tax rate
 Personal Allowance  Up to £11,850  0%
 Basic rate  Between £11,851 and £46,350  20%
 Higher rate  Between £46,351 and £150,000  40%
 Additional rate  More than £150,000  45%

The tax you pay depends on your individual circumstances.
The above examples are based on current law and tax rates and may change. Income tax bands are different if you live in Scotland.

The amount you can earn in a tax year without paying tax is called your Personal Allowance. You’ll only pay tax on income over that allowance. The Personal Allowance drops by £1 for every £2 above £100,000. There is no Personal Allowance where income is higher than £123,700.

Tax will normally be taken off by the pension provider of your income before you receive it, and they’ll pay HMRC the tax you owe on your behalf.

How can my pension income push me into a higher tax bracket?

If you take substantial amounts from your pension pot in any one year, you could become liable to pay higher rates of income tax up to 45%.

The example below shows how your pension income could push you into a new tax bracket when added to your other earnings.

It assumes:

  • Annual earnings of £30,000
  • Taxable pension income of £37,500
  • Therefore total taxable income (earnings + pension) is £67,500. 
How tax is calculated
How the tax is broken down and calculated
 First £11,850  No tax  First part of the £30,000 (non-pension) earnings
 Next £34,500 taxed at 20%  £6,900

 £18,150 comes from the remaining non-pension earnings (£30,000 less £11,850).

The remaining £16,350 comes from part of the £37,500 taxable pension income.

 Final £21,150 taxed at 40%  £8,460  Comes from the remaining taxable pension pot income (£37,500 less £16,350)
 Total tax paid  £15,360  

Tax paid on pension income
Tax paid on the pension income
 £16,350 taxed at 20%  £3,270
 £21,150 taxed at 40%  £8,460
 Total tax paid on pension income  £11,730

Please note, the income tax rates and bands for Scottish residents may be different.

By spreading your withdrawals over more than one tax year, you could avoid falling into a higher tax band, and pay less tax as a result.

What is my standard Personal Allowance?

The standard Personal Allowance for the 2018/19 tax year is £11,850. Any income less than this won’t be taxed. You can check your own Personal Allowance at  Income tax rates.  

How does my pension provider know how much tax I should pay?

The tax deducted is based on the tax code given to your pension provider.

If your pension provider hasn’t received confirmation of your tax code from HMRC, or you haven’t been able to provide a current P45, then your pension provider will use an emergency tax code. This may mean you’ll pay more tax than is due. The emergency tax code assumes you’ll carry on receiving the same amount each month, even if the money you’re taking is a one-off withdrawal.

How can I check the tax I’ve paid is correct?

If you want to check the amount of tax you've paid is correct, you can do that at Check your tax online.

HMRC automatically checks at the end of each tax year if you’ve paid too much or too little tax.

If you think you've paid too much tax, you can wait for your pension provider or HMRC to resolve the over-payment, or, if you don’t want to wait, you can reclaim it.

Find out more about reclaiming any overpayment at claiming a tax refund.  

I think I’ve paid too much tax?

HMRC automatically checks at the end of each tax year if you’ve paid too much or too little tax.

If you think that you’ve paid too much tax and don’t want to wait until the end of the tax year for a refund, contact contact HMRC

I’m not sure what my best option is from a tax perspective?

Don’t worry. There are lots of different options available. That’s why we recommend you seek independent financial advice to help you choose the best options for your personal circumstances.

Find out more about guidance and advice.

Your next steps

Or take a look at

Our Pension Options page shows you the different ways you can access your pension pot.