Tax on your pension lump sum

How tax on a pension lump sum works

When you take money from a defined-contribution pension, the tax follows a simple split. Up to 25% is tax-free, the Pension Commencement Lump Sum, and the other 75% is taxable as income. That taxable part isn’t taxed in isolation. It’s added on top of everything else you earn that year, so it sits in your highest tax bands. A lump sum that looks modest can still be taxed at 40% or 45% once it stacks on your salary or other pensions.

The tax-free cash is capped. Across all your pensions the tax-free total can’t exceed the Lump Sum Allowance of £268,275. For most people a quarter of the pot is comfortably under that, but on very large pots the excess above the cap becomes taxable. Anything you take beyond the 25% is taxed as income too.

Pension withdrawal tax

The tax on a pension withdrawal depends on how you take it. Take the whole pot and only 25% is tax-free while the other 75% is taxed as income in that one year, often pushing it into the 40% or 45% band. Take smaller withdrawals and each one is a quarter tax-free with the remaining three-quarters taxed at your marginal rate. Because the taxable part stacks on your salary, other pensions and the State Pension, the same withdrawal costs more in a high-income year than a low-income one. This calculator shows the tax on a single lump sum; for the income your pot could provide over retirement, use the pension calculator instead.

Why the taxable part can cost more than you expect

Because the taxable 75% stacks on your other income, a big withdrawal in one year can drag you through several bands at once. Between £100,000 and £125,140 there’s an effective 60% band, where every £2 of extra income removes £1 of your Personal Allowance. Taking a large lump sum in a single tax year, rather than spreading it, is the most common reason people pay far more tax than they planned. The band breakdown in the calculator shows exactly where your money is taxed.

Emergency tax on your first drawdown

The first time you take a taxable lump sum, your provider usually doesn’t have your correct tax code, so HMRC rules make them use an emergency “month 1” code. That code treats your one-off payment as if you’ll receive it every month, which over-taxes you heavily up front. You get the money back: reclaim it straight away with HMRC form P55, P53Z or P50Z depending on how much you’ve taken, or let it correct itself through your tax code over the following months.

Ways to pay less tax on your lump sum

Spreading withdrawals over more than one tax year keeps more of the money in the lower bands. Taking only your tax-free cash now and drawing the taxable part gradually is another common approach. Timing a withdrawal for a year when your other income is lower, such as after you stop working, also helps. This tool is a guide to help you compare options. For a decision about your own pension, speak to a qualified adviser or use the free government-backed Pension Wise service.

Frequently asked questions

This calculator is a guide to help you think, not financial or tax advice. It uses 2026/27 income tax bands for England, Wales and Northern Ireland and assumes the taxable part stacks on your other income. Scotland has different bands. For decisions about your pension, speak to a qualified adviser or use the free MoneyHelper and Pension Wise services.