How Is My Pension Taxed When I Retire?

Isn't 25% of my pension tax-free?

Usually, up to 25% of relevant pension benefits can be taken tax-free, subject to the available Lump Sum Allowance and your individual pension rights.

For 2026/27, the standard Lump Sum Allowance is:

£268,275

HMRC confirms both the £268,275 standard allowance and the general rule that individuals can usually take up to 25% of pension benefits tax-free within the applicable allowance.

Some people may have protected rights allowing different treatment.

We've covered this in detail in:

Should I Take My 25% Tax-Free Pension Cash?

Steve's observation

I think the phrase:

"25% tax-free pension"

has caused decades of confusion.

It doesn't mean:

"My pension is basically tax-free."

It normally means a particular part can be taken free from Income Tax within the applicable rules.

The rest still needs planning.

What happens to the other 75%?

Where pension benefits are taken in the usual way, amounts above the available tax-free element are generally taxable when paid as pension income.

That does not necessarily mean 75% is automatically taxed at 20%.

It means that taxable pension income is added to your other taxable income and taxed according to the rules applying to you.

That distinction matters enormously.

What is my Personal Allowance?

For the 2026/27 tax year, the standard UK Personal Allowance is:

£12,570

That is generally the amount of income someone can receive before ordinary Income Tax becomes payable, although circumstances can change the allowance.

For example, the Personal Allowance reduces by £1 for every £2 of adjusted net income above £100,000 and is normally fully lost once adjusted net income reaches £125,140.

The tax year runs from 6 April to 5 April. That becomes very relevant when choosing when pension withdrawals are taken.

What are the Income Tax rates?

For England, Wales and Northern Ireland in 2026/27, after the standard Personal Allowance, the current main bands are:

HMRC confirms these current rates and thresholds for 2026/27.

What if I live in Scotland?

Scottish Income Tax rates and bands differ from those applying in England, Wales and Northern Ireland for relevant non-savings, non-dividend income.

Pension income can therefore be taxed differently for a Scottish taxpayer.

Because Scottish thresholds and rates can change from year to year, they should always be checked for the tax year in which pension benefits are being taken.

So throughout this guide, examples using 20%, 40% or 45% should not be assumed to apply identically to a Scottish taxpayer.

Is the State Pension taxable?

Yes.

State Pension is taxable income. However, tax is not usually deducted directly from the State Pension payment itself.

If you also receive a private pension, HMRC may adjust the tax code used by the private pension provider so that tax due on the State Pension is collected there.

If State Pension is your only income and tax is due, HMRC can issue a Simple Assessment.

This sometimes creates confusion because someone sees £241.30 a week State Pension being paid without tax deducted and assumes it must be tax-free.

It isn't. It is taxable income.

What about a defined benefit pension?

Income from a defined benefit workplace pension is generally taxable pension income.

The pension provider normally operates PAYE and deducts tax before the money reaches you.

So if your DB pension is £20,000 a year, that is usually a gross income figure. What arrives in your bank account depends on the tax position.

Is annuity income taxable?

Generally, yes. If you use registered pension money to buy an annuity, the taxable annuity payments normally count as pension income.

We've covered how annuities work in:

What Is an Annuity and How Does It Work?

The important distinction is: the annuity can guarantee the gross contractual income, but it does not guarantee that the whole amount reaches your bank account free from tax.

How is pension drawdown taxed?

Money remaining invested inside a pension drawdown arrangement is not taxed simply because it remains there.

Tax generally becomes relevant when taxable pension income is withdrawn.

After any applicable tax-free element, drawdown withdrawals are normally taxable pension income.

For more detail on drawdown itself, see:

What Is Pension Drawdown and How Does It Work?

Does taking a large withdrawal mean more tax?

Potentially — and this is one of the biggest practical traps.

Imagine someone normally needs £30,000 a year from taxable pension income. But this year they decide to take another £50,000 to buy a car, pay for a major holiday or help family.

Their taxable pension income for that year could therefore rise materially. Because UK Income Tax uses bands, additional pension income could push part of their total income into a higher tax band.

GOV.UK explicitly warns that taking a large private-pension lump sum may cause some income to be taxed at a higher rate.

A simple illustration

Imagine someone has £25,000 of taxable pension income and decides to take another £30,000 taxable pension withdrawal.

Their pension provider isn't judging whether £30,000 is sensible. It's simply processing a withdrawal.

But HMRC sees taxable income of £55,000 before considering any other taxable income or allowances.

The extra withdrawal can therefore affect which tax bands apply.

This is why "I need £30,000" and "I'll withdraw £30,000 from my pension" should not automatically be treated as the same decision.

Could spreading withdrawals across tax years help?

Timing can affect the amount of tax paid because Income Tax is calculated by tax year.

For example, two large taxable withdrawals taken either side of 5 April / 6 April fall into different tax years. That fact may be relevant when retirement withdrawals are being planned.

But this guide is not recommending that somebody deliberately split withdrawals. Your income, pension needs and tax position need to be considered as a whole.

The teaching point is simply: the tax year matters.

What if I'm still working?

Then salary and taxable pension income generally sit alongside one another.

Suppose you earn £40,000 and then take taxable pension income. You do not receive a second Personal Allowance simply because the money came from a pension. Your taxable income sources are considered together.

We've covered this particular situation in:

Can I Take My Pension and Carry On Working?

What is emergency tax on pension withdrawals?

This is another issue that surprises people.

When certain flexible pension payments are made for the first time and the pension provider does not yet have an appropriate current tax code, HMRC rules can require an emergency tax code on a Month 1 basis.

HMRC's current PAYE guidance confirms that first flexible-access pension payments can be taxed this way.

The calculation effectively treats the payment as though a similar amount might continue during the tax year. That means the provider could initially deduct more tax than the individual's eventual annual liability.

Steve's observation

This is one of retirement's least enjoyable surprises.

You ask for: £20,000.

HMRC's emergency tax calculation briefly behaves as though you've developed a habit of doing something similar every month.

Your bank account then asks: "Where's the rest of it?"

The important thing to understand is that tax deducted at source and your final tax liability aren't always the same thing.

Can I claim overpaid pension tax back?

Potentially, yes. HMRC has specific refund processes depending on what type of withdrawal has been made and whether the pension pot has been emptied.

For example:

• P55 can apply in some situations where a flexible pension payment has been made but the pension hasn't been fully emptied;
• P50Z can apply in certain cases where someone has stopped work and emptied a pension;
• P53Z can apply in certain other full-withdrawal situations where additional income exists.

HMRC confirms that in-year refunds can be claimed in qualifying circumstances rather than necessarily waiting until the end of the tax year. Which process applies depends on the circumstances.

So don't assume: "HMRC took it, therefore that's definitely the final amount of tax I owe."

What if I have several pensions?

HMRC can allocate tax codes across pension providers.

If you have:

• State Pension;
• two defined benefit pensions;
• drawdown income;
• and perhaps employment income,

tax administration can become less intuitive.

GOV.UK confirms that where someone receives payments from several pension providers, HMRC can ask one provider to collect tax due on State Pension through PAYE.

This is another reason to look at retirement income as one household income picture, rather than pension by pension.

Are ISA withdrawals taxed like pension withdrawals?

Generally, no. Withdrawals from an ISA are normally free from UK Income Tax and Capital Gains Tax.

That does not automatically mean "always spend ISA first." The order in which pension, ISA and other assets are used can affect:

• taxation;
• investment risk;
• flexibility;
• inheritance planning;
• future income.

There is no universal sequencing rule appropriate for everybody.

What about an UFPLS?

You may see the abbreviation:

UFPLS — Uncrystallised Funds Pension Lump Sum.

Broadly, this is a method of taking money directly from uncrystallised defined contribution pension funds. Typically, part of an eligible payment can be tax-free and the balance taxable, subject to the pension rules and available allowances.

It is important not to treat an UFPLS as if the entire payment were tax-free.

It can also have Money Purchase Annual Allowance consequences because HMRC identifies an UFPLS as a potential flexible-access trigger event.

Does taking taxable pension money affect how much I can contribute later?

Potentially. If taxable money is flexibly accessed from a defined contribution pension, this can trigger the Money Purchase Annual Allowance.

HMRC confirms that flexible-access events can reduce the future allowance applicable to money-purchase pension savings.

For 2026/27, the MPAA is currently:

£10,000

This matters particularly if you're still working and your employer is still contributing to a pension.

See:

Can I Take My Pension and Carry On Working?

Do I pay National Insurance on pension income?

Ordinary pension income is not generally subject to employee National Insurance in the same way employment earnings are.

Income Tax and National Insurance are separate systems.

If you're also working, National Insurance may still apply to earnings depending on your age and circumstances.

The pension itself should therefore not simply be treated as another salary for every tax purpose.

Does my pension provider decide how much tax I owe?

No. The provider normally operates PAYE using the tax code supplied or required under HMRC rules.

Your ultimate tax liability depends on your actual taxable income and allowances for the whole tax year.

That's why an initial deduction can sometimes later prove too high or too low.

What should I do next?

Before taking taxable pension income, establish:

• How much income you need to spend
• Your total expected taxable income
• Your available tax-free pension cash
• Your remaining Lump Sum Allowance
• Whether you're still working
• Whether the withdrawal could trigger the MPAA
• Which tax year the withdrawal falls into
• Whether the pension provider has the correct tax code

Then distinguish between:

the amount you want to spend

and:

the gross amount that may need to leave your pension.

They are not always the same.

Before making a significant pension withdrawal, establish your expected taxable income for the entire tax year and the amount of tax-free pension cash available. Check how the pension payment will be taxed, particularly if it is the first flexible withdrawal. If several pensions, substantial withdrawals, employment income or different tax bands are involved, regulated financial advice and appropriate tax advice can help assess the consequences before the withdrawal is made.

The Open Door Wealth view

Tax shouldn't be the only reason for doing something with your pension.

But it shouldn't be an afterthought either.

The dangerous question is: "How much can I take?"

The better questions are: "How much do I need?", "How much of that will be taxable?" and: "What does that withdrawal do to the rest of my income this year?"

Your pension provider can process a £50,000 withdrawal. HMRC can tax it.

Neither of them is responsible for deciding whether taking £50,000 in that particular tax year was a sensible retirement decision.

That's where the planning comes in.