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How are private pensions taxed in the UK?

In the UK, private pension saving is taxed on an “exempt, exempt, taxed” (EET) model. This means:

  • When people and their employers pay into a pension, the contributions are exempt from taxation. Both the saver and any contributing employer receive tax relief, up to set limits.
  • If the pension savings grow through investments, this is exempt from taxation.
  • When the savings are withdrawn as pension payments, these are taxed like other income. People are allowed access up to 25% of their pension savings as a tax-free lump sum.
What are the limits to pension tax relief?

There are limits on the amount of pensions tax relief someone can receive.

Limits to tax-free contributions

An annual allowance limits the amount someone can pay into pension schemes each year before they must pay tax. It is £60,000 in 2024/25.

A person cannot usually receive tax relief on pension contributions worth more than 100% of their annual earnings. However, people can still contribute £3,600 a year into a pension with tax relief even if they earn less than this.

The annual allowance is tapered (reduced) for higher earners. It is reduced by £1 for every £2 someone earns over £260,000 (including pension contributions). Tapering stops when the annual allowance reaches £10,000.

In defined contribution pension schemes people build up a pot of money that can be used for retirement. In certain circumstances if someone withdraws money from a defined contribution scheme then the amount that they can contribute to these schemes in future – and still receive tax relief – is permanently reduced. The lower allowance, known as the money purchase annual allowance, is set at £10,000 a year.

Abolition of the lifetime allowance

There was a limit on the amount people can build up in pension schemes over their lifetime and still receive tax relief.

At the Spring Budget 2023, the government announced that it would abolish the lifetime allowance. It started this process by removing the tax charge for exceeding the lifetime allowance from 6 April 2023 and abolished the lifetime allowance fully in the Finance Act 2024 from 6 April 2024.

What are the options for reform?

The Library briefing Reform of pension tax relief covers the debate on wider reforms to pension tax.

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