Tax on Pension Income

Most pension income in the UK is taxable, including the State Pension and private pensions. You only pay tax if your total income from all sources exceeds your Personal Allowance, which is £12,570 for the 2025/26 tax year. The way your tax is collected depends on the types of pension you receive...

How pension income is taxed

Pension income counts towards your total annual income for tax purposes. If your total income from all sources exceeds your Personal Allowance of £12,570, you'll pay Income Tax on the amount above this threshold.

Your taxable income includes:

State Pension (both basic State Pension and new State Pension)
Additional State Pension
Private pensions (workplace or personal)
Earnings from employment or self-employment
Taxable state benefits
Other income such as money from investments, property or savings

The State Pension is taxable income, even though tax is not deducted from the payments themselves. If your total income is below the Personal Allowance, you will not pay tax.

Tax-free pension lump sums

When you start taking money from a private pension, you can usually take up to 25% of the amount built up as a tax-free lump sum. The maximum tax-free amount you can take is £268,275.

This tax-free lump sum does not affect your Personal Allowance, meaning you can still earn up to £12,570 from other sources before paying tax.

Tax is deducted from the remaining pension amount before you receive it. For example, if your pension is worth £60,000 and you take £15,000 tax-free, your pension provider will deduct tax from the remaining £45,000.

When you can access your pension depends on your scheme's rules, but the earliest age is usually 55.

Taking large lump sums from your pension

If you take some or all of your pension as a lump sum, you'll pay Income Tax on any part that exceeds your lump sum allowance or your lump sum and death benefit allowance.

Taking a large amount from a private pension may push you into a higher tax rate for that year. You could also owe extra tax at the end of the tax year, so it's worth planning withdrawals carefully.

Small pension pots

Special rules apply to small pensions:

Pensions worth up to £10,000: You can usually take the entire amount as a 'small pot' lump sum, with 25% tax-free. You can take up to three small pot lump sums from different personal pensions, and unlimited small pot lump sums from different workplace pensions.

Pensions worth up to £30,000: If you have £30,000 or less across all your private pensions and this includes a defined benefit pension, you can take everything as a 'trivial commutation' lump sum. Again, 25% is tax-free. All payments must be received within 12 months of the first payment.

How tax is collected on pension income

The method of tax collection depends on your circumstances:

State Pension and private pension: Your private pension provider will usually deduct any tax you owe before paying you, including tax owed on your State Pension. If you receive payments from multiple pension providers, HMRC will instruct one provider to collect the tax on your State Pension. You'll receive a P60 at the end of the tax year showing how much tax you've paid.

State Pension only: If the State Pension is your only income and you exceed your Personal Allowance, HMRC will send you a Simple Assessment tax bill telling you how much you owe and how to pay.

Working while receiving a pension: Your employer will deduct any tax owed from your earnings, including tax on your pension income. If you're self-employed, you must complete a Self Assessment tax return declaring all income, including State Pension and private pensions.

Other income: If you have income that doesn't come from an employer or pension (such as rental income or investment income), you must inform HMRC. You may need to complete a Self Assessment tax return.

Understanding your tax code on pensions

If your income comes from only one source, you'll usually have one tax code. However, you can have several tax codes if you have income from multiple sources, such as different pensions or a combination of pensions and employment.

Your tax code tells your pension provider or employer how much tax to deduct from your payments. Each income source will have its own tax code to ensure the correct amount of tax is collected.

When you need to complete a tax return for pension income

You must complete a Self Assessment tax return if you're self-employed and receiving pension income. You need to declare your total income, including State Pension and private pensions.

You may also need to complete a tax return if you have income from sources other than employment or pensions, such as property rental income or significant investment income.

Checking if you'll pay tax on your pension

HMRC provides an online tool to check whether you'll pay tax on your pension income. To use it, you'll need to know:

Whether you have a State Pension, private pension, or both
How much pension income you'll receive during the tax year (6 April to 5 April)
The amount of any other taxable income you'll receive

You cannot use this tool if you receive foreign income, Marriage Allowance, or Blind Person's Allowance.

Sources

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.