You don't want to pay more tax than you have to after years of investing for your future
A pension is a long-term investment. Its value can go down as well as up and could be worth less than was paid in. Laws and tax rules may change in the future. Your own circumstances and where you live in the UK will also have an impact on tax treatment.
Do I pay tax on pension income?
From age 55 (rising to 57 from 6 April 2028) you can start to take money from your pension pot. Normally, 25% of your pension pot can be taken tax-free. The remaining 75% will be taxed in the same was as any other income.
Much like the income you earn from employment, you have a personal allowance that isn't taxed. The standard allowance is £12,570 (2024/25 tax year), but it may be lower if your income is over £100,000, or larger if you claim Marriage Allowance or Blind Person's Allowance. You'll need to pay tax on any pension income above your personal allowance.
How are pension savings taxed?
If the total income from your pension savings is more than your personal allowance, you’ll need to pay income tax. Your income could include:
State Pension
Private pension (workplace or personal)
Earnings from employment
Any taxable state benefits
Any other income from investments, property, savings, etc.
If you have a pension plan with Standard Life, we apply tax to the payments we make to you according to government guidelines. The government will confirm your tax code to us if you are taking an income – just as they would to an employer.
How much tax will I pay on my pension income?
The tax you pay on your pension depends on how much your total income is for the year. If you have a standard personal allowance, these are the rates and bands for 2024/25.
You only pay tax at these rates for the income within that band
Basic rate (20%)
If your income is between £12,571 to £50,270, you will pay the basic tax rate of 20%.
Higher rate (40%)
If your income is between £50,271 to £125,140, you will pay the higher tax rate of 40%.
Additional rate (45%)
If your income is over £125,140, you will pay the additional tax rate of 45%.
Tax treatment depends on your individual circumstances including where you live in the UK. The above example is for someone living in England, Wales, or Northern Ireland. Income tax bands/rates are different in Scotland. Tax rules may change in the future.
Normally you can take the first 25% of your total pension pot tax-free, although this depends on the type of pension plan you have and if you have exceeded your lifetime allowance. This tax-free amount won't count towards your personal allowance.
From age 55 (rising to 57 from 6 April 2028), you can access your pension savings and take your tax-free lump sum in a couple of different ways.
A single lump sum: You can take your 25% tax-free amount in one lump sum.
Several smaller lump sums: You can take out several lump sums, and 25% of each lump sum will be tax-free.
After you've taken your tax-free lump sum(s), any remaining money will stay invested. This could give your pension savings more opportunity to grow.
Remember, the value of investments can go down as well as up and you may get back less than was paid in. If the overall value of your pension pot falls, the value of your tax-free lump sum will fall too.
The money you take out of your pension savings – above the tax-free lump sum and your personal allowance – is taxable, just like a salary. The amount you take out and when you take it could affect how much tax you pay.
For instance, if you take out a large amount from your pension pot in one tax year, this may push you into the higher rate tax band. This means you would have to pay 40% tax on the amount within that band. By spreading pension withdrawals over several tax years instead, you may be able to stay within the basic tax band – meaning you would only pay 20% on your taxable pension income.
Remember that tax treatment depends on your individual circumstances, including where you live in the UK. Tax rules may change in the future.
If you’re married or in a civil partnership, you may be able to claim Marriage Allowance.
To claim this allowance, one of you must be a non-taxpayer, who can transfer 10% of their personal allowance to the other. The person who receives the transferred allowance (Marriage Allowance) must be a basic rate taxpayer. In Scotland you can transfer an allowance if the person receiving the allowance is a starter rate, basic rate, or intermediate rate taxpayer.
How to reduce the amount of tax you pay in retirement
There are a few different ways to help you reduce the amount of tax you pay on your pension income.
Tailored Drawdown: Some pension plans give you more freedom around how often you can take money from your pot. Some let you take out money as either phased payments of tax-free lump sum(s), taxable income, or a mixture of the two. This could help you take a retirement income more tax-efficiently. You can even change how you take your money depending on your situation. Keep in mind that you might need to get specific financial advice if you're thinking about this option.
Top up your pension: You can continue paying into your pension plan even if you've started taking money from it, and doing so could lower the income tax you pay. Remember that your pension savings are invested, and its value can go down as well as up and you could get less back than was paid in. Also, bear in mind that there is a pension annual allowance – this is the amount you can save into your pension plan tax-free each year. The standard allowance is £60,000, which means if you pay in more than this amount, you could get a tax charge. In some circumstances it could be lower. You can find out more in our Pension Annual Allowance guide.
Make a donation to charity: Making a donation to a charity using Gift Aid can help lower your total taxable income.
Salary Exchange: If you're working, you may be able to pay into a workplace pension using Salary Exchange. It can lower the National Insurance you pay. This might not be right for you and not everyone can do this as it depends on whether your employer offers this option or not.
These tips should not be regarded as financial advice. We recommend you seek appropriate guidance or advice before you make any decisions. From age 50, you can also get free impartial guidance from Pension Wise, a service from MoneyHelper. Visit the MoneyHelper website or call 0800 138 3944.
Read our downloadable tax guide
We have a handy guide to how your pension and retirement income is taxed. It goes into more detail around tax benefits, limits and more.
