When you take money from your pension pot as a lump sum, most of it is taxed. Here’s how it works:
- The first 25% of your pension pot is tax-free. (There is a maximum limit of £268,275.)
- The remaining 75% is taxed as income. The tax you pay depends on your total income for the tax year.
When you first take money from your pension, it might be taxed at a higher emergency rate. This helps prevent underpaying tax. HMRC will adjust the tax later through the Pay As You Earn (PAYE) system if needed.
You could pay less income tax overall by taking your pension money in smaller amounts over time, instead of all at once.