Do I pay tax on my pension?

How the tax-free lump sum works

When you take money from a private pension (a workplace or personal pension), part of it is usually tax free. You can normally take up to 25% of each pension pot as a tax-free lump sum. The most you can take tax free across all your pensions is £268,275. This limit is called the lump sum allowance.

The other 75% is taxed as income, in the same way as wages. It is added to your other income for the tax year, such as the State Pension.

You will not usually pay tax if your total income for the year is less than your Personal Allowance, usually £12,570.

Lump sum limits at a glance

If a lump sum goes over your allowance, you pay Income Tax on the extra.

Small pots

If a pension pot is worth £10,000 or less, you can usually take it all at once. 25% is tax free and the rest is taxed. You can do this up to 3 times for personal pensions. There is no limit for workplace pensions.

If all your private pensions add up to £30,000 or less, you may be able to cash in a whole pension as a lump sum. Again, 25% is tax free.

Worked examples (2026/27, England, Wales and Northern Ireland rates)

Both examples assume the person also gets the full new State Pension of £241.30 a week, which is £12,547.60 a year.

Example 1: cashing in a £40,000 pot

• Tax free: 25% of £40,000 = £10,000.
• Taxable: £30,000, plus £12,547.60 State Pension = £42,547.60.
• Take off the £12,570 Personal Allowance: £29,977.60 is taxed.
• All of this is in the 20% basic rate band, so tax is £5,995.52.

Example 2: cashing in a £100,000 pot in one tax year

• Tax free: £25,000.
• Taxable: £75,000 plus £12,547.60 = £87,547.60.
• After the Personal Allowance, £74,977.60 is taxed.
• The first £37,700 at 20% = £7,540. The next £37,277.60 at 40% = £14,911.04.
• Total tax: £22,451.04.

A large withdrawal can push you into a higher tax rate.

How the tax is taken

Your pension provider usually takes off any tax before paying you, using a tax code from HM Revenue and Customs. Each year your provider sends you a P60 showing the tax you paid. If the State Pension is your only income and it is more than your Personal Allowance, HMRC sends you a tax bill instead (called Simple Assessment).

If too much tax was taken

You can claim it back from HMRC. If you claim by post, use the right form:

HMRC checks the amount at the end of the tax year and contacts you if anything needs to change.

If you live in Scotland

The tax-free 25% is the same. But the taxable part of your pension is taxed at Scottish rates, from 19% to 48% in 2026/27, so the tax in the examples above would be different.

Related guides

• How does pension tax relief work?
• How much is the State Pension?
• What is the Personal Allowance for 2026/27?
• What does my tax code mean?
• Can I keep working after State Pension age?

Where these figures come from

• Tax when you get a pension
• Tax-free pension amounts
• Lump sum allowance
• How tax on your pension is paid
• Claim a tax refund on your pension by post
• Income Tax rates and allowances
• Scottish Income Tax
• Benefit and pension rates 2026 to 2027