Pension and tax: Everything you need to know

Private pensions are a key tool to help you plan for your retirement, but it’s important to understand the rules around tax and tax relief if you’re going to take full advantage of your retirement savings.

Why does pension tax matter?

Pensions are a tax-efficient way to save for your future, but tax is still a major consideration and it literally pays to know the rules and where you stand. 

Who should pay attention to pension tax rules?

Pension tax rules matter to anyone saving into a pension of any kind. If you earn a lot, save a lot, or are near retirement age then you need to be especially aware of how tax could affect your pension.

Basic pension tax relief applies to all private pensions, whether you pay into a personal pension or a workplace one. But different tax rules can come into play at different stages of retirement planning. 

• In your 30s and 40s you may want to take full advantage of your available tax relief, while also staying on the right side of your Annual Allowance.
• Once you’re in your 50s and begin to approach pension age it pays to know your withdrawal options, as well as when tax does and does not apply.

How are pensions taxed?

Pension tax (and the accompanying rules around pension tax relief) can be broken down into three areas: 

• Tax-relief when you pay into your pot
• Tax-free growth on funds inside your pot
• Tax-free and taxable withdrawals when taking funds out of your pot

Do I pay tax on my State Pension? 

Yes, the State Pension is considered taxable income, just like wages, private pension withdrawals, and some state benefits. If the sum total of all your income sources, including State Pension, is more than £12,570 per year then you’ll pay income tax in the following bands: 

• Total annual income between £12,571 to £50,270 will be taxed at the basic rate of tax, which is 20%
• If your annual income is higher than £50,270, then any income between £50,271 and £125,140 will be taxed at the higher rate of tax, which is 40%
• If your annual income is over £125,140, then anything over that amount will be taxed at the additional rate of tax, which is 45%.

What is pension tax relief?

Pension tax relief enables you to contribute to your pension without income tax being deducted from those contributions, so the level of tax relief you get depends on how much income tax you pay. 

• Basic pension tax relief is 20%, so basic-rate taxpayers get a £0.20 top-up for every £0.80 paid in. 
• If you’re a higher or additional rate taxpayer you can claim more in tax relief because you pay more in income tax. In most cases only the basic 20% tax relief is given automatically, so if you’re in a higher tax bracket you’ll need to claim the additional tax relief yourself through your tax return. 

How do pension contributions get tax relief?

Tax relief is applied to pension contributions in one of two ways: 

• Through a net pay arrangement
• Through a relief-at-source arrangement. 

Both methods can offer the same amount of tax relief, but they do so in slightly different ways. 

For most people the difference between the two is only a technicality, but if you’re a particularly low or a particularly high earner then the scheme you’re in (net pay or relief-at-source) may have more of an impact.

Relief at source vs. net pay arrangements

• Relief at source: With relief-at-source arrangements your pension contributions will be made after you’ve paid income tax, leaving your pension provider to reclaim your 20% tax relief later through HMRC.
• Net pay arrangements: With net pay arrangements your pension contributions are deducted before  tax is calculated, so your pension provider will receive those contributions with pension tax relief already included.

What are tax relief limits and the Annual Allowance?

The Annual Allowance marks the upper limit where tax relief stops in any one tax year. 

You generally can't pay in more than your annual salary per tax year, and the overall contribution limit (inclusive of your contributions, employer contributions and tax relief) is £60,000 a year, although for high earners it may sometimes be a little less. 

What counts towards the Annual Allowance?

The Annual Allowance is set at £60,000, unless you’re a very high earner, and it covers all contributions towards your private pensions: 

• Your own contributions (which usually can’t exceed 100% of your salary)
• Your employer’s contributions
• Third-party contributions
• Tax relief.

Example

If you earn £40,000 per year then you can pay a maximum of £40,000 into your pension and still get tax relief: £32,000 would come from you and £8,000 via tax relief. At this point your employer could pay in £20,000 before you hit the £60,000 limit.

Carry Forward

The Annual Allowance lasts for one tax year, but you can Carry Forward unused allowance for up to three years. 

For example, if you usually pay £50,000 a year into your pension, but this year you get a bonus and increase your contribution to £75,000 then you’d normally be liable for tax on the additional £15,000 above the Annual Allowance. 

With the Carry Forward rule, you can gain relief on this additional £15,000 by ‘carrying forward’ unused allowance from previous years.

Tapered Allowance

If you’re a high earner (with income typically above £200,000 per year) you may face a tapered allowance, which essentially means you have a smaller Annual Allowance. 

The typical Annual Allowance of £60,000 reduces by £1 for every £2 of ‘adjusted income’ – that’s your total earnings plus employer pension contributions – you have above £260,000. 

Example

Let’s consider an example of how the Tapered Allowance rule would apply if you had a very high annual income:

• You earn £250,000 a year
• You pay £30,000 into your pension 
• Your employer matches your contribution, paying £30,000 into your pension pot as well
• Your “adjusted income” is then calculated as £280,000 instead of £250,000, since your employer’s pension contributions are counted towards that total.

Because of the Tapered Allowance rules your Annual Allowance would be reduced by £1 for every £2 over £260,000. You’re £20,000 over so your allowance reduces by £10,000 to £50,000. 

Because £60,000 has gone into your pension pot you’re now £10,000 above your allowance, and as such you’ll probably face what’s called an annual allowance tax charge on that £10,000. 

What is the lifetime allowance (LTA) and is it still relevant?

The Pension Lifetime Allowance was the total amount you could have in pension savings without incurring an additional tax charge. The LTA itself was discontinued in April 2024 but it’s still relevant because three new and vaguely similar allowances have replaced it.

Impact of LTA changes on high earners and large pots

When the LTA was in place pension savers with large pots might look to retire early or late to get around the tax limits. High earners might put funds into other types of investments instead of pensions.

When the LTA was retired it sat at £1,073,100, and that number features heavily in the three allowances that replaced it: the lump sum allowance, the lump sum and death benefit allowance (LSDBA), and the overseas transfer allowance (OTA). 

These three rules may affect your tax planning, especially if you’re a high earner or have a substantial pension pot. 

• The lump sum allowance: you can typically withdraw the first 25% of your pension tax free but there is an upper limit. That upper limit is 25% of the old LTA, or £268,275. Withdraw more than that and you’ll pay tax. 
• The lump sum and death benefit allowance: £1,073,100 is the maximum amount of tax-free lump sums that can be paid out in respect of an individual. This includes tax-free sums received by the individual during their lifetime and death benefits passed to a beneficiary or beneficiaries.
• The overseas transfer allowance: the maximum amount of pension savings that you can transfer into a Qualifying Recognised Overseas Pension Scheme (QROPS) before tax is charged is £1,073,100.

How are pension withdrawals taxed?

Pension withdrawals are classed as income and as such incur income tax at standard rates, although it can work a little differently in practice based on what you’re withdrawing, when and how. 

The 25% tax-free lump sum

You can withdraw the first 25% of your pension, either in a single lump sum or in phased withdrawals, completely tax-free up to a maximum amount of £268,275. 

Tax on income drawdown

After withdrawing 25% tax-free out of your pension, the remaining 75% is taxable. If you draw down on your pension, which means taking out funds as-and-when you need them, you will pay income tax on any amount exceeding the £12,570 annual tax-free personal allowance. 

Note that withdrawing large sums, or flipping between small withdrawals and big withdrawals, could alter your tax situation and push you into a higher bracket. 

Tax on annuities 

An annuity is a way to buy a guaranteed income that won't change, so the tax on that income should remain consistent too.

Annuity income is taxable in the same way as any other pension income though. Once your total annual income goes above the tax-free personal allowance of £12,570, then any income over that amount is taxable at standard UK income tax rates.

Money Purchase Annual Allowance (MPAA)

The MPAA is relevant if you’re contributing to a pension while, at the same time, withdrawing from one too. It caps what you can pay in tax-free at £10,000 per year.

The MPAA only affects Defined Contribution pensions and is basically a mechanism to stop people abusing tax relief. Withdrawing your initial 25% tax-free sum probably won’t trigger the MPAA, but it’ll likely kick in if you make further flexible withdrawals.  

What are expat pension tax rules?

If you live abroad, or are planning to move overseas, you’re still entitled to the UK State Pension so long as you made enough National Insurance contributions over your working life to qualify. 

You’ll still be able to access your private pension too, but whether you enjoy the same levels of tax relief may depend on where you relocate to and that country’s rules. 

Tax on UK pensions if you live abroad

If you live abroad and receive income from a UK pension, whether State or private, that income is taxable and as such you may need to pay income tax in the UK.

This may get complicated as most likely you’ll have to report your income where you live for tax purposes too. 

The UK has Double Taxation Agreements with lots of countries – from Albania to Zimbabwe – in order to ensure you only pay tax once, but this likely means extra paperwork and, depending on where you live, you may need to pay local tax up front before reclaiming it through a settlement process.   

Transferring to an overseas pension scheme (QROPS)

The QROPS system lets you transfer your UK pension savings into a 'qualifying recognised overseas pension scheme' to avoid paying substantial tax. 

• If you transfer into a QROPS scheme you can take your UK pension abroad with less tax to pay, and in some cases no tax
• Transferring your pension into a non-QROPS scheme in another country may incur tax of 40% or more.

QROPS schemes are not all automatically tax-free. Transferring into one in the EU, for example, is tax-free provided you don’t exceed your Overseas Transfer Allowance, but transferring into pension schemes in some other countries or economic zones may incur 25% tax.

What is the pension tax for different age groups?

Your pension savings goals can vary quite considerably during different phases of your life, so depending on your age and life stage you can use tax rules and tax relief to maximise what you’re putting away for your future. 

How to make pension tax work for you in your 30s

If you’re saving for retirement in your 30s then you have time on your side to benefit from compounding growth, not only on what you contribute but on the tax relief you receive, as well as contributions from your employer. 

Consider maintaining contributions, even at a lower level, through periods of transition, such as changing careers or starting a family, in order to take full advantage of your opportunities for tax relief.

How to make pension tax work for you in your 40s

Your 40s may be a pension growth phase, so aim to maximise your contributions while staying on the right side of your Annual Allowance - which for most people is £60,000 a year – and remember that you can use Carry Forward rules to carry over unused allowance from the prior three years to avoid paying tax on larger contributions. 

Paying into your partner’s pension is possible and can be a good way to invest in the future you’ll share together. How much you can contribute depends on your partner’s tax status: if they don’t earn or have very low earnings then you can contribute up to £2,880 – which becomes £3,600 with government top-up – to their pension pot in one tax year.

If your partner is earning then you can contribute more so long as they don’t go over their Annual Allowance, which is usually £60,000. If you plan to make a sizeable contribution to your partner’s pension it’s up to you to ensure that they haven’t already reached their annual allowance via their own contributions, employer contribution and government top ups.  

Also, by this time in life you may have had several employers, so aim to track down all your old workplace pensions and weigh up the pros and cons of consolidation.

How to make pension tax work for you in your 50s

Once you reach your 50s it would be a good idea to begin planning how and when and how you’ll withdraw and manage your 25% tax-free lump sum, remembering that the more you withdraw now the less there’ll be for later and the quicker you’ll move into the taxable 75% of your pension.

At this point you may want to explore withdrawal strategies for your pension and investigate options such as buying an annuity. If your plan is to simply draw down on your fund then note that taking big chunks of your taxable pension can have heavy tax implications, especially if you’re still working, plus you risk draining your pot too quickly if you withdraw too much.

You can pay into a pension while withdrawing from one too, but note that you may trigger the Money Purchase Annual Allowance, which reduces the amount that you can contribute, while receiving tax-relief, to £10,000 per year.

At this age it's also worth planning what should happen to your pension if and when you pass away. Make sure your beneficiaries are up-to-date and remember that £1,073,100 in pension funds, including death benefit and inheritance, can be passed on tax-free. 

Funds in some ISAs and investments may be subject to inheritance tax, but pensions do not currently incur inheritance tax so it may be worth engaging a financial adviser for more advice about your unique situation and how to avoid unnecessary tax.

Pension inheritance and death benefits

Pension inheritance and death benefits differ based on your family and marital situation and whether you have a Defined Benefit or Defined Contribution pension.  

• Defined Contribution: When you die your Defined Contribution pension passes to one or more of your designated beneficiaries, who can usually receive their share as a lump sum, an income, or a combination of both. If you’re under 75 when you die, and your pension pot doesn’t exceed the  Lump Sum and Death Benefit Allowance (LSDBA) limit of £1,073,100, then it’s unlikely that your beneficiaries will pay tax. If you’re over 75 or your total pot exceeds the LSDBA limit then tax is likely. Death benefits from pensions currently avoid inheritance tax in most cases, but this is due to change in 2027. 

• Defined Benefit: If you have a Defined Benefit pension then the rules on death will be written into your policy; what happens next will likely depend on your age at death, the size of your pension, and whether you have already accessed your fund. While rules differ between schemes, Defined Benefit pensions typically pass a scheme member’s pension to a spouse / civil partner or financial dependents. Sometimes they may also provide a lump sum.

This is a complicated area but as a rule of thumb, if you die before retirement then lump sums paid out to your beneficiaries are usually free of tax. If you die after retirement then lump sums paid to your beneficiaries may be taxable. 

Nomination of beneficiaries

Most Defined Contribution pensions typically ask you to fill out an "expression of wish" or "death benefit nomination" form where you specify who should receive your pension benefits after your death. It is important to know who you have nominated, as you may wish to update your wishes after big life events. 

Marital status

If you’re unmarried and intend your pension death benefits to pass to your partner then it’s crucial that you specifically nominate that person. 

Married couples and civil partners have many more legal rights and protections than unmarried couples.

What are common pension tax traps?

Pension tax rules appear complicated and there are a handful of tax traps that it’s easy to fall foul of. 

• Going over the annual allowance without realising: If you contribute a lot to your pension, and your employer does the same, it can be easy to lose track and risk going over your annual allowance. To avoid overpaying tax keep track of your statements and, if you have gone over, you may have unused allowance from the prior three years. 
• Large lump sum withdrawals: Once you’re into the taxable 75% of your pension, large or inconsistent withdrawals could affect your tax situation and land you with a hefty bill. So be wary of large withdrawals, especially if you have other income sources, and aim to understand the tax implications before taking funds out. If possible, spread withdrawals among different tax years to keep your exposure down. 
• Not utilising spousal contributions: Spousal or partner contributions are a tax-efficient way of topping up your partner’s pension and particularly beneficial if your partner has a low income or a pension gap. How much you can contribute depends on your partner’s tax status. If your partner is a low earner or non-earner then the maximum you can contribute is usually £2,880, which becomes £3,600 with government top up. If your partner does earn then you may be able to contribute more to their pension but it is up to you both to make sure no-one exceeds their Annual Allowance.

When should I seek professional advice?

Professional advice is never a bad idea but it’s especially worthwhile if you’re a high earner with a large pension pot; you’re nearing retirement; you have a complex family situation; or you’re looking into inheritance planning. 

• High earners: if you have a tapered allowance or a large pension pot, a professional can help you to navigate the system and make strategic moves to keep your present and future tax exposure as low as possible.
• Growth phase: if you hit your Annual Allowance a professional can help you uncover unused allowance to carry forward from prior years or keep saving in other tax-efficient ways. 
• At retirement: you may require support on devising a pension withdrawal strategy, especially if you plan to continue working, that won’t incur unnecessarily high tax. 
• Complex family situations: if you’re part of a blended family, a family that spans borders or if divorce has been a factor, professional advice can help you to decide on a course of action that is lawful, fair, and tax efficient. 
• Inheritance planning: if you have a significant pot or sizable assets then professional advice can help you to arrange your estate so that your loved ones don’t pay unnecessary tax.

Frequently asked questions on pension and tax

Do I pay National Insurance on pension income?

No, you don’t pay National Insurance on any pension income, whether it’s State, workplace or private. 

Note that you probably will continue to pay NI contributions on your salary or self-employed income until you reach the State Pension age, even if you’re making withdrawals from a private pension before then.

Does marital status change my tax relief?

Your marital status can affect your tax relief, because one spouse can transfer up to roughly 10% (£1,260) of their £12,570 tax-free personal allowance to their partner, reducing their partner’s tax bill by up to £252 in a tax year. 

What happens if I put more than 60k in my pension?

The Annual Allowance is £60,000, inclusive of government tax relief, so if you pay more than that amount into your pension in any single year then you may face a tax bill unless you can put the excess against unused allowance from a previous year via the Forward Carry rule.

What is the tax allowance for pensioners​?

Pensioners receive the same tax-free Personal Allowance as other people that are receiving an income in the UK, which for the 2025/26 tax year amounts to £12,570. Any pension income over this amount would be liable for tax. 

How much can I take tax-free from my pension?

You can withdraw the first 25% of your pension tax-free, whether you take it in in a single lump sum or in a series of withdrawals. 

Once you have withdrawn 25% of your pension pot, the remaining 75% is taxable.

Do I have to declare my pension income on a tax return?

In many cases you don’t have to complete an income tax self-assessment to declare your pension income, although it does depend on what else you earn and where that other income comes from. 

• State Pension: If the State Pension is your only income source then you'll fall under the personal allowance and therefore won’t pay tax. 
• Private pension: Your private pension provider should deduct any tax you owe, including tax on your State Pension, before they pay you.  If private and State Pensions are your only source of income then it’s unlikely you’ll have to file a self assessment. 
• Still working: If you work and receive a pension it usually falls to your employer to deduct tax on your wages and on your pension at the same time. 
• Self employed: If you’re self-employed you must fill in a self-assessment each tax year to declare your overall income, including any income you received from State and private pensions. 
• Other income sources: If you receive earnings that aren’t from an employer or a pension then most likely you’ll need to complete a regular self-assessment. Some examples include income from a buy-to-let property or dividends from equity in a limited company.