Do I pay income tax on pension income?

Is my personal pension income tax free or do I need to pay tax? If I need to pay take what tax rate do HMRC apply?

Question asked by Peter Busby
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Answered by Andrew Jenkinson

A pension arrangement is split into two parts. You can take a lump sum of up to 25% tax-free, while anything above this is subject to Income Tax at your marginal rate.

If you want to draw a regular income from your pension in a tax efficient manner, then the first 25% of each withdrawal you make will be tax-free, and the remainder will be taxed at your marginal Income Tax rate.

Your pension provider will provide you with payslips and contact HMRC for a tax code. You may initially over pay Income Tax until the pension provider receives your correct tax code.

Alternatively, you could buy an annuity. You can still take the first 25% of your pension tax-free, but then the remainder is used to buy yourself an income for life from an insurance company. This annuity income will also be added to the rest of your income and taxed at your highest marginal rate.

Read Drewberry’s guide on the differences between annuities and income drawdown.

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tax free lump sum
 
income tax
 
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This information does not constitute financial or other professional advice. You should consult your professional adviser or contact us directly on 02084327333 should you require financial advice. It is important to ensure any insurance policy you take out is suitable for your needs.
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