Pensions tax

This briefing gives an overview of pensions taxation in the UK. HMRC’s Pensions Tax Manual has much more detailed information.

The Library briefing Direct taxes: rates and allowances for 2024/25 outlines the direct tax rates and principal tax allowances in the UK. More detail on tax rates and allowances for the 2024/25 year are set out in Annex A to HM Revenue & Customs, Overview of Tax Legislation and Rates.

Income tax

Income from pensions, including the state pension, is liable for income tax, just as income from earnings, taxable social security benefits, trading profits, and income from property. However, pension savers do not pay income tax on contributions to pension schemes (they receive tax relief).

There are limits to the tax relief they receive. People may need to pay income tax on pension contributions if they exceed the tax relief limits.

Limits to pensions income tax relief

Usually, people cannot receive income tax relief on pension contributions above their annual earnings. However, they can still contribute up to £3,600 a year with tax relief even if their earnings are lower than this.

The annual allowance limits how much tax relief people can receive on pension contributions. In 2024/25, people can contribute up to £60,000 into pension schemes without paying income tax. The annual allowance tapers for higher earners, meaning that it reduces as earnings increase.

People who have already accessed a pension may also be limited by a lower allowance – the money purchase annual allowance.

Paying income tax on payments from pensions

People pay income tax on income from pensions, including the state pension.

People can access up to 25% of their pension without paying income tax. In 2024/25, the standard maximum tax-free lump sum is £268,275.

In cases of serious ill-health people might be able to receive a lump sum of up to £1,073,100 without paying income tax.

Inheriting a pension

How someone inherits a pension when a member of a pension scheme dies depends on the type of pension scheme, the age of the member when they died, and the rules of that scheme.

Someone inheriting a pension will pay either no tax, income tax, or inheritance tax.

At the Autumn Budget 2024, the government announced that from 6 April 2027 most pension funds and pension death benefits will fall within someone’s estate and will be considered when calculating inheritance tax.

National Insurance Contributions

Employees, the self-employed, and employers pay National Insurance Contributions (or NICs).

Employers do not pay NICs on pension contributions, but employees and self-employed people do. Some employers offer salary sacrifice pension schemes to make tax-efficient use of this difference.

Corporation tax

Companies, public corporations, and unincorporated associations pay corporation tax on profits. Employers can usually deduct pension contributions from taxable income when calculating a company’s taxable profit – reducing taxable profits and therefore corporation tax due.

Unauthorised payments from pensions

Unauthorised payments from pension schemes may incur additional tax charges. Any payment not envisaged under tax legislation is an unauthorised payment. Unauthorised payments include lump sums paid before someone’s normal retirement age, unless made on ill-health grounds.

Pension investments

Generally, pension scheme investment growth is not taxed. However, certain types of investments are taxed.