Wojciech
Diploma for Financial Advisers
Diploma in Accounting
Member of London Institute of Banking and Finance
When you start thinking about taking money from your pension, one of the first questions that comes to mind is: How much tax will I pay if I withdraw my pension? Understanding this is important to avoid surprises and to make the most of your hard-earned savings. Here, we’ll break it down for you in simple terms.
Tax-Free Lump Sum
Most pension schemes in the UK allow you to take up to 25% of your pension pot as a tax-free lump sum. This means you won’t pay any tax on this portion, no matter how much your pension is worth. For example, if your pension pot is £200,000, you can withdraw £50,000 without paying tax.
Tax on the Rest of Your Pension
Any money you take out beyond the tax-free 25% is treated as income. This means it’s added to your other earnings for the tax year and taxed according to the UK’s income tax bands. For the 2024/25 tax year, these are:
- Personal Allowance: Up to £12,570 – 0% tax
- Basic Rate: £12,571 to £50,270 – 20%
- Higher Rate: £50,271 to £125,140 – 40%
- Additional Rate: Over £125,140 – 45%
For example, if you earn £30,000 a year from your job and withdraw £30,000 from your pension, your total taxable income will be £60,000. Part of your pension withdrawal may push you into a higher tax band.
Emergency Tax on Pension Withdrawals
Be aware that when you first withdraw money from your pension, your provider might apply an emergency tax code. This could result in you paying too much tax initially. You can claim back any overpaid tax by completing a form (such as P55, P53Z) and sending it to HMRC.
Planning Your Withdrawals
To reduce the amount of tax you pay, you could:
- Spread Withdrawals Across Tax Years: Taking smaller amounts over several years might help keep you in a lower tax band.
- Check Your Personal Allowance: If you’re no longer working, you might have more room to withdraw without exceeding the basic tax threshold.
- Consider Other Income Sources: Make sure you factor in other earnings, such as rental income or investments, when planning your pension withdrawals.
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Example Scenarios
- Scenario 1: Jane has no other income and withdraws £20,000 from her pension. She takes £5,000 tax-free (25%) and pays 20% tax on the remaining £15,000.
- Scenario 2: Mike earns £45,000 a year and withdraws £30,000 from his pension. After taking £7,500 tax-free, his remaining withdrawal of £22,500 pushes him into the higher tax band. He pays 20% tax on part of it and 40% on the rest.
Get Expert Advice
Understanding how much tax you’ll pay when withdrawing your pension can be tricky, especially if you have other sources of income. Speaking to a financial expert can help you plan withdrawals in the most tax-efficient way.
If you’re unsure about your options, get in touch with an independent financial guidance professional to explore strategies tailored to your situation.
Final Thoughts
Managing your pension withdrawals carefully can make a big difference to how much tax you pay and how long your savings last. Always think ahead, and don’t hesitate to seek advice if needed.
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