Retirement means the golden years of your life, not the beginning of unexpected tax surprises. Therefore, many retirees in the UK ask this critical question: Do you pay tax on your pension? The answer is straightforward: You have to pay taxes on your retirement income. However, there is a personal savings allowance up to £12,570 for the 2025/26 tax year, and you do not have to pay for national insurance (NI) on pension income.
Apart from these, there are several ways to minimize your tax burden as a retiree in the UK. This article will show you the important tricks you need to know and things you should be aware of for unexpected tax bills.
Key Takeaways
- Your pension counts as income and is subject to income tax. However, for the 2025/26 tax year, you can earn up to £12,570 tax-free. Above that, your income is taxed at 20%-45%, depending on your income level.
- You can usually withdraw 25% of your pension pot without paying tax. The remaining 75% is taxed as income.
- While pension income is taxable, retirees do not pay National Insurance on it.
- If you believe you have overpaid tax, you can get in touch with HMRC to request a refund.
How Pensions are Taxed?
In the UK, pensions are treated as taxable income. When you start drawing money from your pension, it will be subject to income tax. However, everyone is entitled to a personal allowance tax.
For the 2025/26 tax year, this allowance is £12,570. If you pass this threshold, here are the rates showing how much tax you will pay on your pension:
- Basic rate (20%): £12,571 to £50,270
- Higher rate (40%): £50,271 to £125,140
- Additional rate over (45%): £125,140
Note that your pension income will be combined with any other income you may have. This might include earnings from rental income, interest, or part-time work.
3 Types of Pension
The UK has three main categories of pensions: State Pensions, Workplace Pensions, and Personal Pensions.
1. State Pensions
The state pension is a regular payment from the government. You can claim your state pension when you reach the state pension age, which is age 66 or 68, depending on when you were born:
| Your Date of Birth | When You Can Usually Claim Your State Pension |
| 6 October 1954 to 5 April 1960 | On your 66th birthday |
| 6 April 1960 to 5 April 1977 | Between the ages of 66 and 67, based on your exact date of birth |
| 6 April 1977 to 5 April 1978 | Between the ages of 67 and 68, based on your exact date of birth |
| After 6 April 1978 | On your 68th birthday |
In 2025/26, you will receive £230.25 a week, which equals £11,973 a year, if you choose the state pension. Besides, it is also a taxable income source for HMRC. However, if your UK state pension tax implications stay below the personal allowance, you do not have to pay any taxes.
2. Workplace Pension
Workplace pensions are arranged by your employer. There are two main types of them. The first one is defined-contribution pensions. Either your employer can set it for you, or you can set it by yourself.
The contributions you made are invested in funds such as stocks, bonds, or other assets. Therefore, your retirement income depends on how well the investments perform. You can typically have access to them from age 55 (rising to 57 in 2028). However, you should be aware that the first 25% is a tax-free lump sum; the remaining is taxed as income.
The other one is defined benefit pensions. Although they are not common, they provide you with a pension based on your salary and how long you have been in the scheme.
3. Personal Pensions
You can arrange your pension independently of your employer. They are mostly preferred by self-employed individuals or those who wish to maximise their retirement savings.
The process works as follows: You pay money into a pension pot. Then, it is invested to help it grow over time. Here, your main aim should be to build up enough savings for your retirement. Thereby, you can use it from age 55 ( 57 in 2028).
Tax on Your Pension Lump Sum
If you decide to take money from your pension lump sum, you will usually be taxed. However, if you take up to 25% of your total retirement income pot, you can take advantage of the tax benefit and pay no taxes.
On the other hand, if you take more than 25%, you have to pay taxes on your pension. The amount will be based on your total income for that given tax year.
As an example, think that you have a £100,000 pension pot. If you take £25,000, it is tax-free. If you take more than that, it will be added to your other income sources and taxed accordingly. This usually causes a big burden on your tax bill. Therefore, you should take your money gradually over time.
Do You Pay Taxes on Pension Contributions?
As a tax-resident in the UK, you might ask yourself: Do I have to pay tax on pension contributions? The answer is yes. As one of the most effective ways to save for retirement, this option comes with tax relief. This means you can claim a tax refund from HMRC.
So, how to claim tax relief on pension contributions? You can only get tax relief in two ways:
- Relief at source: Your contribution is taken after tax from your pay or bank account. Besides, the pension provider adds 20% tax relief from the government.
- Net Pay: Your pension contributions are taken before tax is calculated. You will automatically receive full tax relief.
Considering these, do your pension contributions reduce your taxable income? It depends on how the contributions are made. In some cases, they reduce your tax bill directly; in others, they do not. For example, if you pay into a pension from your relief at source, it does not lower. However, you will still receive relief.
To reduce your tax burden, you need to reduce your taxable income. In this case, you might make a salary sacrifice arrangement with your employer in exchange for pension contributions.
Do You Pay Tax on a Private or Personal Pension?
Private pension income is subject to taxation in the UK. However, this depends on the type of your pension and how you access your funds.
As we stated earlier, 25% of your income is tax-free; the remaining 75% is treated as taxable income under the PAYE system. If it exceeds the personal allowance, you have to pay taxes based on certain rates starting from 20% to 45%.
How Much Tax Do You Pay on Your Pension?
Although the UK increases the state pension each year, the personal allowance stays at £12,570. This results in tax burdens on the retiree’s shoulders. Therefore, they frequently ask this question: “How much tax do I have to pay on my pension?” Well, it depends on whether you stay below the personal allowance limit or not.
If you have a higher income than the personal allowance limit, you have to pay between 20% to 45%. Nevertheless, there are still some ways to reduce your tax liability. Now, let’s look at how you can effectively manage your retirement income.
How Can You Avoid Paying Higher Tax Rates on Your Pension? 6 Ways
You cannot entirely avoid paying tax on your pension. Nevertheless, there are legal and strategic ways to reduce your tax liability and keep more of your retirement income.
1. Use Your 25% Tax-Free Lump Sum
By knowing that you can take up to 25% of your retirement tax-free, you can turn this into an advantage. You must consider how and when you will withdraw this money, so you can avoid paying extra taxes.
Let’s say you’ve just retired with a £100,000 pension pot, and you are ready to start using it. In one case, you decide to move your entire pension into an income drawdown plan or use it to buy an annuity.
Right away, you can take 25% of the pot tax-free. The remaining 75% stays invested, and you choose to withdraw just £5,000 a year to top up your other income. Thus, you stay in the lower tax band.
2. Stay Within Your Allowance
For 2025/26, the personal allowance is £12,570. If your total annual income, including pensions, rental income, and other taxable income, stays below this threshold, you do not pay any income tax.
3. Withdraw Gradually
Taking your pension in smaller and regular amounts can help you stay in a lower tax band. Thus, it will be useful over a longer period.
4. Coordinate with Other Income Sources
If you have other income (such as investments or rental income), consider how and when to withdraw from your pension to minimise your tax bill.
You can also consider tax-free income sources. These include:
- Individual Savings Accounts (ISAs): Any interest, income, or capital gains from investments held in an ISA are entirely tax-free.
- Personal Savings Allowance: If you’re a basic rate taxpayer, you can earn up to £1,000 in interest per year tax-free. For higher-rate taxpayers, it is £500.
- Dividend Allowance: You can have up to £500 a year in dividend income tax-free.
5. Consider annuities
An annuity transforms your pension pot into a guaranteed income for life or a set period. However, there are some tax implications to consider. Since the income is fixed, you can find yourself in a higher tax band if not planned carefully.
6. Be Prepared for Future Inheritance Tax Changes
Right now, if you pass away, your pension is usually not counted as part of your estate. That means your family does not have to pay inheritance tax on it.
But from April 2027, this is likely to change. If your total estate, including your pension, is worth more than the tax-free limit, your loved ones might have to pay inheritance tax on what you leave behind.
Here, you can:
- Check that your pension beneficiaries are up to date.
- Talk to a financial adviser about ways to reduce potential tax for your family.
- Consider passing on assets during your lifetime.
FAQs on Taxes on Pension
Is annuity income taxable?
Yes. Any income you receive from an annuity is taxed as regular income under PAYE. It means the amount you pay depends on your total annual income and tax band.
How much tax do you pay on pension drawdown?
The first 25% of your pot is tax-free. After that, any withdrawals you make are taxed as income according to the tax rates of that specific year.
Do you pay tax and National Insurance on your pension?
You do pay income tax on most pensions (after using your 25% tax-free lump sum). Yet, you do not pay National Insurance (NI) on pension income.
Does the DWP check your savings?
Yes, DWP may check your savings on your bank account when you apply for means-tested benefits, such as Pension Credit, Housing Benefit, or Universal Credit.
