Pensions tax

In the UK, pensions are only usually liable for income tax at the point they are withdrawn. There is tax relief for contributions to pension schemes below certain thresholds (someone can’t usually pay more than their annual earnings, or more than £60,000 a year, without paying income tax). Growth in the value of pension investments is not usually taxed.

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 2025/26 outlines the direct tax rates and principal tax allowances in the UK. More detail on tax rates and allowances for the 2025/26 financial year are set out in Annex A to HM Revenue & Customs’ Overview of Tax Legislation and Rates.

Is pension income liable for income tax?

Income from pensions, including the State Pension, is liable for income tax, just like 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 pension savers receive. People may need to pay income tax on pension contributions if they exceed the tax relief limits.

What are the limits to pensions income tax relief?

People usually cannot receive income tax relief on pension contributions that exceed their annual earnings. However, even if they earn less than £3,600 a year (or have no earnings), they can still contribute up to this amount (£3,600) with tax relief.

The annual allowance limits how much tax relief people can receive on pension contributions. In 2025/26, 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.

How much pension income is tax free?

People pay income tax on pension income, including payments from the state and pension schemes. The first part of a person’s earnings, their personal allowance, is tax-free. In 2025/26, the standard personal allowance is £12,570.

People can access up to 25% of their pension without paying income tax. In 2025/26, 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 (a one off payment) of up to £1,073,100 without paying income tax.

What happens to someone who inherits 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 may have to pay income tax, inheritance tax, or neither, depending on the circumstances.

At the 2024 Autumn Budget, 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.

Are National Insurance contributions paid on pension contributions?

Employees, self-employed people 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.

How do pension contributions affect 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.

Are unauthorised payments from pensions schemes taxed?

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.

Are pension scheme investments taxed?

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