If you’re approaching retirement, you might be asking, “Do I get taxed on my pension?” It’s a crucial question and the answer could significantly affect your income. Understanding the tax rules around pensions can help you make better decisions about your finances.
Whilst pensions are designed to be a tax-efficient way to save for later life, that doesn’t mean all your pension income is tax-free. The way you access your pension can impact how much you pay, and some key decisions like when and how you take a tax-free lump sum can make a big difference.
This guide explains everything you need to know, including how much of your pension you can access tax-free, what counts as taxable income and how to make smart, informed decisions to minimise your tax bill.
What is a Pension Tax-Free Lump Sum?
When accessing a defined contribution pension, most are entitled to take up to 25% of their pension pot as a tax-free lump sum. This is sometimes referred to as the Pension Commencement Lump Sum (PCLS). For many, this is one of the most attractive benefits of pensions savings.
For example, with a pension pot of £200,000, you could withdraw £50,000 tax-free, either in one go or spread across multiple withdrawals, depending on your circumstances. The remaining 75% of your pot is still accessible, but it will be taxed as income under standard UK tax rules.
If you’re wondering “Do I get taxed on my pension?” – the answer is yes, for the portion of your pension that exceeds the 25% tax-free lump sum.
Is Pension Income Taxable?
After taxing your 25% tax-free amount, the rest of your pension is considered taxable income. This means it’s added to your total income for the year and taxed according to the applicable tax bands.
If you have other sources of income, such as the State Pension, part-time work, or rental income, these will be added to your pension withdrawals to calculate your total tax liability.
Here are the current income tax thresholds:
| Band | Taxable Income | Tax Rate |
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 to £50,270 | 20% |
| Higher Rate | £50,271 to £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
If you withdraw large amounts from your pension in a single year, this could push you into a higher tax band, meaning more of your income could be taxed at a higher rate.
For example, let’s say you have an £120,000 pension pot:
- You take £30,000 tax-free
- You withdraw £20,000 in taxable income
- You also receive a State Pension worth £11,500
Your total taxable income for the year is £31,500. After your £12,570 personal allowance, you’ll be taxed at 20% on the remaining £18,930, which results in £3,786 in tax.
So, do you get taxed on your pension? Yes. If you withdraw more than your tax-free lump sum, the rest is taxable and contributes to your overall income for the year.
Taking this in one go can feel like a hit, but by spreading your withdrawals over several years, you may stay within lower tax bands and reduce your liability. Many assume they won’t owe much tax in later years, but taking larger lump sums could trigger you to pay more tax than necessary or reduce any means-tested benefits. Our expert team can help you plan your withdrawals to stay in control throughout your retirement.
Tips to Reduce Pension Tax
You can’t completely avoid tax, but with careful planning, you can manage it more efficiently by:
- Taking your 25% tax-free lump sum wisely – consider phasing it to support income or one-off needs
- Using ISAs to draw additional tax-free income
- Structuring pension withdrawals to stay in lower tax brackets
- Considering how your State Pension and other income sources affect your total tax position
- Working with an FCA-Regulated independent financial adviser
If you’re asking “Do I get taxed on my pension?”, the key is understanding your allowances, being aware of how much you’re withdrawing, and considering the timing of your income.
Understanding how pensions are taxed can help you keep more of your hard-earned money in retirement. The key is to know your allowances, be aware of how much you’re withdrawing and considering the timing of your income.
At My Pension Expert, we help people make smarter decisions with their pensions every day. From understanding how much you can take tax-free, to building a long-term, tax-efficient retirement plan, we’re here to guide and support you every step of the way.
Want to understand how to make the most of your pension income? Speak to an expert today and start planning a tax-efficient retirement.
