The tax paid on a pension lump sum depends on how much you withdraw and your total taxable income in the tax year. Generally, you can take up to 25% of your pension as a tax-free lump sum. The remaining 75% of the lump sum is taxable and is added to your other income for the year, being taxed at your marginal income tax rate. Here are some key points about pension lump sum taxation in the UK for 2025:
- Up to 25% of your pension pot can be taken tax-free, with a maximum tax-free lump sum limit of £268,275.
- The other 75% will be taxed as income according to your income tax bands (20% basic rate, 40% higher rate, etc.).
- Your personal allowance (usually £12,570) applies to all your income including taxable pension withdrawals.
- If you take a large lump sum in one tax year, it may push you into a higher tax bracket.
- Defined contribution pensions allow this 25% tax-free lump sum option. Defined benefit pensions are more complex and have different rules.
- Emergency tax codes might cause over-taxation initially, but you can reclaim excess tax paid.
For example, if you take a £100,000 lump sum and your other income for the year is zero, £25,000 would be tax-free, and £75,000 would be taxed as income. The exact tax you pay depends on your overall income and the applicable tax rates for that year. If more detailed calculations or personalized estimates are needed, including how other income affects your tax rate, pension income tax calculators are available online to help. This summary should help understand how the tax on a pension lump sum is calculated in general terms for 2025.
