A pension is taxed on the way out, not the way in, and the rules are short: a quarter tax-free, the rest income. What the rules do not show is the arithmetic. Tax bands are annual, the State Pension already fills most of the allowance, and HMRC taxes a first withdrawal as if it will happen every month.
What is taxed and what is not
GOV.UK says you can usually take up to 25% of the amount built up in any pension as a tax-free lump sum, and that the most you can take is £268,275 (GOV.UK, Tax when you get a pension, checked 1 November 2026). It calls that cap the lump sum allowance (GOV.UK, Tax on your private pension contributions, checked 1 November 2026). Everything else you take is income.
The State Pension is income too, and putting it off to earn more is on our deferring page. GOV.UK’s list of what counts includes the State Pension, a private pension, earnings from a job, taxable benefits and savings interest (GOV.UK, Tax when you get a pension, checked 1 November 2026). The tax-free lump sum page covers the 25% in detail.
The personal allowance, and who is using it
The standard personal allowance for 2026/27 is £12,570, the amount of income GOV.UK says you do not pay tax on (GOV.UK, Income Tax rates and Personal Allowances: current rates and allowances, checked 1 November 2026). Income above it is taxed. A full new State Pension of £241.30 a week (GOV.UK, Plan your retirement income, checked 1 November 2026) is £12,547.60 a year, so it uses almost all of it.
That is why a modest private pension is taxed from the first pound. The State Pension is paid without tax deducted. GOV.UK says the tax is usually taken from your other income through a tax code. If the State Pension is your only income and you go over the allowance, HMRC sends a bill instead, a Simple Assessment (GOV.UK, Tax when you get a pension, checked 1 November 2026).
From April 2027: the Pension Tax Allowance
From 6 April 2027, people over State Pension age whose total income is no more than the full new State Pension, £13,036.40 a year in 2027/28, will pay no income tax on it. HM Treasury calls this the Pension Tax Allowance, and HMRC applies it automatically, with no claim needed (HM Treasury, Pension Tax Allowance explainer, checked 1 November 2026).
It counts income from every source, including a private pension, earnings, savings and property. Above £13,036.40 the allowance shrinks by £1 for every £3 of extra income, so it runs out at £13,319, and from there tax is paid as it is now. In 2027/28 the full allowance is worth up to £94 (HM Treasury, Pension Tax Allowance explainer, checked 1 November 2026).
It was announced in the Budget on 28 October 2026 for three tax years, from 6 April 2027 to 5 April 2030, rising with the full new State Pension (HM Treasury, Budget 2026, checked 1 November 2026). The Treasury says it will consider any arrangements beyond April 2030 in the usual way (HM Treasury, Pension Tax Allowance explainer, checked 1 November 2026). It does not change the 2026/27 tax year.
The bands for 2026/27
Income above the allowance is taxed in bands, and the bands are the reason a single large withdrawal costs more than the same money taken over two or three years. The figures below are GOV.UK’s for England, Wales and Northern Ireland (GOV.UK, Income Tax rates and Personal Allowances: current rates and allowances, checked 1 November 2026).
| Band (England, Wales and Northern Ireland) | Taxable income | 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% |
Scotland sets its own rates and bands on the same £12,570 allowance: a 19% starter rate to £16,537, 20% to £29,526, 21% to £43,662, 42% to £75,000, 45% to £125,140 and 48% above (GOV.UK, Income Tax in Scotland: current rates, checked 1 November 2026).
The £39,000 trap
GOV.UK says you may have to pay Income Tax at a higher rate if you take a large amount from a private pension, and that you may also owe extra tax at the end of the tax year (GOV.UK, Tax when you get a pension, checked 1 November 2026). The reason is that the taxable 75% lands in one tax year, on top of everything else.
Take a £39,000 pot in full. A quarter, £9,750, is tax-free. The remaining £29,250 is added to that year’s income. For someone already receiving a full State Pension, the allowance is used up, so all £29,250 falls in the 20% band: £5,850 in tax. Add earnings or another pension and part of it crosses £50,270 into 40%.
Spread over two tax years, the same £29,250 is taxed at 20% in each, and none of it reaches the higher band unless other income takes it there. That is arithmetic from GOV.UK’s bands, not advice about what to do; whether to spread a withdrawal depends on what the money is for.
The first payment is over-taxed
HMRC’s instructions to pension providers say that a first flexible payment is taxed using the emergency tax code on a week 1 or month 1 basis (HMRC, Paying a company pension or annuity through your payroll, checked 1 November 2026). Month 1 means the payment is taxed as though it were one of twelve, so a one-off lump sum gets a twelfth of the allowance and of each band.
On a £29,250 taxable payment that puts most of the money in the 40% and 45% bands for that month, and the deduction can be more than double the tax due for the year. The money comes back, but by claim or after the year end. Our emergency tax page sets out the forms, P55, P53Z and P50Z, and HMRC’s timescale.
Small pots and trivial commutation
Two exits for small pensions. GOV.UK says a pension worth up to £10,000 can usually be taken in one go as a small pot lump sum, and that where all your private pensions total £30,000 or less and include a defined benefit one, the lot can go as a trivial commutation lump sum (GOV.UK, Tax when you get a pension, checked 1 November 2026).
Small pots can be taken up to three times from personal pensions and without limit from workplace pensions. Both are taxed the same way, a quarter free and the rest as income, but they leave your contribution allowances untouched. Our small pots page covers the limits and the valuation rules.
Paying in after taking out
Once you have flexibly accessed a pension, the amount you can pay into defined contribution pensions before tax is due drops from the £60,000 annual allowance to the £10,000 money purchase annual allowance (GOV.UK, Tax on your private pension contributions: annual allowance, checked 26 October 2026) (HMRC, Check if you’ve gone above the money purchase annual allowance, checked 26 October 2026). Taking only the tax-free lump sum does not trigger it.
Someone with no earnings can still pay in £2,880 a year and have the provider claim 20% tax relief on it (GOV.UK, Tax on your private pension contributions, checked 1 November 2026). Our money purchase annual allowance page covers what triggers the lower limit and what does not, and the rule at 75.
Pension Credit and other benefits
A lump sum taken and kept is savings for Pension Credit. GOV.UK says £10,000 or less does not affect it, and every £500 over £10,000 counts as £1 a week of income, and that you must report taking a lump sum out of your pension pot (GOV.UK, Pension Credit, checked 1 November 2026).
An untouched pension counts too. GOV.UK says that if you are entitled to a personal or workplace pension and have not claimed it, the amount you would expect to get still counts as income (GOV.UK, Pension Credit, checked 1 November 2026). Housing Benefit and Council Tax Reduction at pension age use the same £10,000 disregard with a £16,000 limit, on our Housing Benefit savings page. Our Pension Credit hub covers the means test, and money given away after a withdrawal is on the deprivation of assets page.
When you die
What is left in a pension is taxed by the age you die. GOV.UK says most lump sums and drawdown or annuity payments to a beneficiary are tax-free where the owner died under 75, and have Income Tax deducted by the provider where the owner was 75 or over (GOV.UK, Tax on a private pension you inherit, checked 1 November 2026).
Inheritance Tax is changing. The government’s policy paper says most unused pension funds and death benefits will come into the scope of Inheritance Tax from 6 April 2027, with personal representatives liable for reporting and paying it (GOV.UK, Inheritance Tax: unused pension funds and death benefits, checked 1 November 2026). Our Inheritance Tax hub covers the thresholds that apply now, and the pensions from April 2027 page the change itself.
Before you take a lump sum
Three checks before the money moves, none of them advice. If you or a partner get Pension Credit, Housing Benefit or Council Tax Reduction, a lump sum kept becomes savings and must be reported. Taking taxable money flexibly cuts what you can pay in to £10,000. And a large sum in one tax year is taxed in that year’s bands.
Each is covered above with its source. The person to put them to is a Pension Wise guide or a regulated adviser, not this page.
Guidance first, then advice
GOV.UK says you can get free guidance on your retirement savings options from MoneyHelper, and that Pension Wise offers anyone over 50 an appointment about a defined contribution pension, but does not cover the State Pension or final salary and career average schemes (GOV.UK, Personal pensions, checked 1 November 2026).
For a decision about your own money, GOV.UK points to a financial adviser found through Unbiased or the Personal Finance Society, and says you can take up to £500 from a pension to pay for retirement advice, once a year up to three times, without a tax charge (GOV.UK, Plan your retirement income, checked 1 November 2026). Nothing on this site is advice; it is the rules, with the dates they were checked.
One date sits underneath all of this: the age you can take the money at all. When you can take a private pension covers the rise from 55 to 57 in April 2028, and why State Pension age is a separate question.