Pension flexibility
Under pension flexibility, there are more ways that you can take the money from your pension, from age 55. This also means there is more freedom in the way the money you don’t pay tax on can be taken.
How ‘tax free’ cash can be taken
You have the option to either:
- Take 25% of your pension pot tax free in one go, meaning any more money you take out (withdrawals) will be taxed as income.
For example, if you have £20,000 in your pension pot, you can take £5,000 out in one go without paying tax because it’s 25% of your entire pot. You will pay tax when you take out the rest – £15,000.
- Take 25% of every cash withdrawal tax free, with the remaining 75% taxable as income.
For example, if you have a pension pot of £20,000 and take out £1,000 at a time, you will pay no tax on the first £250 but will pay tax the rest of the payment (£750). This will happen every time you take out the £1,000.
Whichever option you choose, any amount taken above of the 25% will be taxed under Pay As You Earn (PAYE). This means that your pension provider will take the tax from your pension on behalf of HMRC.
How the tax is taken
Tax is taken using the PAYE system. You might be familiar with this If you are or have been an employee because this is the way your employer took tax off your wages or salary.
What tax do I pay on pension withdrawals?
Payments that you need to pay tax on are usually taxed using an ’emergency code’ on a monthly basis.
This is how a monthly payment will be taxed in the tax year 2025/26:
- They won’t tax the first £1,048 because this is your personal tax-free allowance for the month based on the yearly £12,570 in 2025/26.
- They will tax the next £3,142 at 20% because this is the basic rate for monthly income (from the £37,700 yearly band).
- They will then tax the next £7,309 at 40% because this is the higher rate (based on the £87,710 yearly band).
- They will tax any income over £11,499 at 45%
Note: Tax rates in Scotland may be different.
What if my pension provider uses a weekly payroll scheme?
Most pension providers use a monthly calculation. If your pension provider uses a weekly payroll scheme, the yearly figures would be divided by 52. This would mean even more tax was deducted, which is why most providers calculate tax by month.
How do I claim back overpaid tax?
In most cases in-year refunds are possible. You can complete a form to claim back tax on flexibility accessed pensions. You can complete this form online or print and return it by post. You can also search for the form in your personal tax account or you can call HMRC on 0300 200 3300. It is important that you answer all the questions on the form so that the right amount of tax refund can be worked out and paid.
If you need help with your pension and tax, here’s where you can find more support.
What if I have other sources of income?
When you take a payment from your pension, it’s important that HMRC know if you have other sources of income. If they don’t know this, it could mean you pay too much or too little tax. If you’ve got other income, it’s a good idea to check what you need to do.