When you save for retirement using a pension, you enjoy three big benefits.
- Firstly, there’s tax relief when you pay money in.
- Secondly, there’s tax-free growth on your investments.
- And thirdly, when you take money out after age 55 (57 from 6 April 2028), part of it is tax free.
So if part of your withdrawal is tax-free, what about the rest of it? We look at the taxes that apply when you access your pension – for example, your AJ Bell SIPP.
Want to learn more about pensions? Read about the generous tax relief on money you pay in, and how much you can pay in each year.
Can I take some of my pension tax free?
Yes, you can normally take 25% of your pension tax free, subject to a lump sum allowance of £268,275 for most people.
How much tax will I pay on my pension?
As above, you can usually take 25% of your pension tax-free. The rest that you withdraw (whether as income or a lump sum) will be taxed in the same way as income you earn from working.
That means how much tax you pay depends on how much you withdraw. Taking a large sum of money from your pension could push you into a higher-rate tax band, meaning you pay a lot more tax than you had planned.
How do I pay the tax that’s due when I access my pension?
Just as when you’re working, pension withdrawals use a pay-as-you-earn (PAYE) system. We must deduct tax using your tax code, which is provided to us by HMRC.
Discover more information about tax codesHow does it work when I make my first taxable withdrawal?
When you first take a taxable income payment or lump sum from your pension, we may have to deduct income tax using an emergency tax code.
That means, if you take out a large amount from your pot, you could overpay tax. Don’t worry, you can claim it back from HMRC – we explain how below.
What is an emergency tax code?
If no tax code has been issued to us by HMRC, or we don’t have a valid P45 for the current tax year from your previous pension provider, we need to use an emergency tax code.
An emergency tax code works on a ‘month 1’ basis. That means it assumes that you get one twelfth of the basic annual tax allowance – £12,570 for the current tax year – each month, and any income above that is taxed assuming you’ll have the same income every month. It doesn’t take into account any other income or tax you may have paid.
Let’s say you decide to withdraw £6,000 from your pension pot, and have an emergency tax code. It’ll be assumed that you have an annual income of £6,000 x 12, or £72,000. As a result, you’ll pay tax as follows, depending on the type of withdrawal:
| Drawdown income payment – 25% tax free cash already withdrawn | UFPLS lump sum payment – includes 25% tax free (only applies to parts of your pension which have not already been accessed and the tax free cash withdrawn) | |||
|---|---|---|---|---|
| Band | Amount | Tax due | Amount | Tax due |
| Tax free @ 0%, including personal allowance of £12,570 | £1,048 | £0 | £2,548 | £0 |
| Basic rate – £0- £37,700 @ 20% | £3,142 | £628 | £3,142 | £628 |
| Higher rate – £37,700 - £125,140 @ 40% | £1,810 | £724
|
£310 | £124 |
| Additional rate – £125,140+ @ 45% | ||||
| Total | £6,000 | £1,352 | £6,000 | £752 |
| Overpayment – assuming you will actually be a basic rate tax payer for the year | £362 | £62 | ||
The personal allowance reduces by £1 for every £2 of income above £100,000 – down to zero when income reaches £125,140. If your withdrawal multiplied by 12 months puts you over this amount, you’ll pay even more tax. For example, if you decide to withdraw £25,000 and have an emergency tax code, it’ll be assumed you have an annual income of £300,000. So your tax will be calculated as follows:
| Drawdown income payment – 25% tax free cash already withdrawn | UFPLS lump sum payment – includes 25% tax free (only applies to parts of your pension which have not already been accessed and the tax free cash withdrawn) | |||
|---|---|---|---|---|
| Band | Amount | Tax due | Amount | Tax due |
| Tax free @ 0% | £0 | £0 | £6,250 | £0 |
| Basic rate – £0- £37,700 @ 20% | £3,142 | £628 | £3,142 | £628 |
| Higher rate – £37,700 - £125,140 @ 40% | £7,286 | £2,914
|
£7,286 | £2,914 |
| Additional rate – £125,140+ @ 45% | £14,572 | £6,558 | £8,322 | £3,745 |
| Total | £25,000 | £10,100 | £25,000 | £7,287 |
| Overpayment – assuming you will actually be a basic rate tax payer for the year | £7,614 | £6,051 | ||
How do I reclaim any overpaid tax on my pension?
If you have overpaid tax, you can usually reclaim it from HMRC. If you’re taking a regular pension income, HMRC will give you another tax code that puts you in the correct position over the rest of the tax year.
For one-off or ad hoc payments, HMRC should calculate any tax you’ve overpaid and refund you after the end of the tax year.
But it’s usually quicker to make a claim for overpaid tax within the tax year, using one of the following HMRC forms:
- P50Z – if the withdrawal used up your whole pension pot and you have no other income in the tax year
- P53Z – if the withdrawal used up your whole pension pot and you have other taxable income
- P55 – if you withdrew only part of your pot, and you’re not taking regular payments
Access these forms on the Gov.uk website
To learn more about your pension options, see our guide to accessing your pension.
Disclaimer: These articles are for information purposes only and are not a personal recommendation or advice. You should consider consulting a regulated financial adviser or a tax adviser if you’re in any doubt about what to do. How you're taxed will depend on your circumstances, and tax rules can change.
An AJ Bell SIPP gives you complete flexibility on how much you save for retirement, and allows you to decide when and where your pot is invested.
You've saved hard for your retirement, but once you get there, what are your options?
Written by:
Charlene Young
Pensions and Savings Expert
Charlene Young is AJ Bell’s Pensions and Savings Expert. She joined AJ Bell in 2014 from a wealth management firm where she worked with private clients and small businesses as a financial planner.
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