A Simple Guide to Pension Tax Planning

• You’ll need to pay tax if your total annual income goes over your Personal Allowance.
• You can usually take up to 25% of your pension pot as a tax-free lump sum (the rest is taxed as income)
• Sometimes an emergency tax code might apply to your first withdrawal
• Higher earners need to be cautious with pension tax rules

Pension tax relief is when the government tops up a payment you make into your pension with additional money. This is usually money you’ve paid through income tax.

Typically your employer or pension provider applies tax relief automatically on your behalf. However, you might need to claim pension tax relief yourself if you:

• pay into an old retirement annuity contract
• don’t earn enough to pay income tax
• pay income tax at a higher rate than 20%

Generally speaking you can take 25% of any pension pot as a tax-free lump sum. The remaining 75% will usually be taxed like income you get from working.

That means that the among of tax you pay will depend on the tax band you’re in. And your income tax band will depend on your annual income that exceeds your personal allowance. This income can include earnings, pension income, savings interest and investment returns.

Under the pension freedom rules, you can withdraw the first 25% of your pension tax-free. However, sometimes when you make the initial withdrawal your pension provider will apply an emergency tax code which could result in you overpaying tax. You can claim back any overpaid tax by contacting HMRC.

Find out more about more in our free pension drawdown guide.

Tax-efficient pension drawdown (or flexible retirement income) is when you take some of your pension as a tax-free lump sum (up to 25%) and leave the rest invested.While your money is invested, the value of your retirement fund can still rise or fall unti you take it out.

You might need to submit a Self Assessment tax return if your income goes over your personal allowance. If you are self employed during retirement then you’ll need to report your earnings to HMRC too. The rules around tax can be complicated so if you’re unsure it’s worth speaking with a tax specialist to make sure you’re paying the right sums.