Pension Tax UK 2025

Last verified: • Updated for 2026/26 tax year

Complete guide to pension tax relief, annual allowances, and tax on retirement income. Calculate your pension benefits and savings.

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Pension Tax Relief Calculator

Total Tax Relief
£0
Net Cost to You
£0
Total to Pension
£0
Effective Rate
0%

Key Pension Allowances 2025/26

£60,000
Annual Allowance
Maximum contributions with tax relief per year
£268,275
Tax-Free Cash Limit
Maximum 25% lump sum you can take
£10,000
Money Purchase Annual Allowance
Reduced allowance after flexibly accessing pension
Lifetime Allowance Abolished: From April 2024, the Lifetime Allowance (LTA) was abolished. However, limits remain on your tax-free lump sum (25% up to £268,275) and lump sum death benefits.

How Pension Tax Relief Works

When you contribute to a pension, the government adds tax relief. The amount depends on your income tax rate:

Tax Rate You Pay Tax Relief Added Total in Pension
Basic Rate (20%) £80 £20 £100
Higher Rate (40%) £60 £40 £100
Additional Rate (45%) £55 £45 £100

Relief at Source vs Net Pay

There are two ways pension tax relief is applied:

Relief at Source

Your pension provider claims 20% basic rate relief automatically. Higher/additional rate taxpayers claim extra relief via Self Assessment.

Common with: Personal pensions, SIPPs, some workplace pensions

Net Pay Arrangement

Contributions taken from gross salary before tax. You get full relief at your marginal rate automatically through payroll.

Common with: Many workplace pension schemes

Pension Tax Relief Examples

Basic Rate Taxpayer

Salary£35,000
Monthly Contribution£300
You Pay (after 20% relief)£240
Government Adds£60
Total to Pension£300
Annual Relief: £720

Higher Rate Taxpayer

Salary£60,000
Monthly Contribution£500
Basic Relief (auto)£100
Higher Relief (claim)£100
Effective Cost£300
Annual Relief: £2,400

Annual Allowance Rules

Standard Annual Allowance: £60,000

The maximum you can contribute to pensions with tax relief each tax year. This includes:

Carry Forward

If you haven't used your full allowance, you can carry forward unused amounts from the previous 3 tax years:

Tapered Annual Allowance: If your 'threshold income' exceeds £200,000 AND 'adjusted income' exceeds £260,000, your allowance reduces by £1 for every £2 over £260,000, down to a minimum of £10,000.

Money Purchase Annual Allowance (MPAA)

If you flexibly access your defined contribution pension (e.g., start taking income via drawdown), your annual allowance for money purchase pensions drops to £10,000.

MPAA is NOT triggered by:

Tax on Pension Income in Retirement

The 25% Tax-Free Lump Sum

When you access your pension (from age 55, increasing to 57 from April 2028), you can take up to 25% as a tax-free cash lump sum. The maximum is £268,275.

Taxable Pension Income

The remaining 75% of your pension is taxable when withdrawn. It's added to your other income and taxed at your marginal rate:

Income Band Tax Rate
£0 - £12,570 (Personal Allowance) 0%
£12,571 - £50,270 20%
£50,271 - £125,140 40%
Over £125,140 45%
Tax Planning Tip: Consider spreading pension withdrawals across multiple tax years to stay within lower tax bands. Taking large lump sums can push you into higher rate tax.

State Pension and Tax

The State Pension counts as taxable income, but it's paid without tax deducted. For 2025/26:

£11,502
Full New State Pension
Per year (from April 2024)
£221.20
Weekly Amount
35 qualifying years needed

If your State Pension is your only income, you won't pay tax as it's below the £12,570 Personal Allowance. But if you have other pension income, employment, or investments, your combined income may be taxable.

Self Employed Pension Tax Relief

Self-employed individuals can contribute to personal pensions (SIPPs) and receive the same tax relief as employees:

Example: A self-employed consultant earning £80,000 profit contributes £10,000 to a SIPP. They pay £8,000, the provider adds £2,000 (20% relief), and they claim another £2,000 (additional 20%) via Self Assessment. Net cost: £6,000.

Pension Options at Retirement

Annuity

Buy a guaranteed income for life with your pension pot. Income is taxable as pension income.

Pros: Security, guaranteed income
Cons: Less flexible, rates vary

Drawdown

Keep pot invested and withdraw as needed. Flexible but requires management.

Pros: Flexibility, potential growth
Cons: Investment risk, pot can run out

Lump Sums (UFPLS)

Take uncrystallised funds pension lump sums. 25% of each withdrawal is tax-free.

Pros: Simple, flexible
Cons: Triggers MPAA, 75% taxable

Frequently Asked Questions

Can I claim tax relief if I don't pay tax? +
Yes, even non-taxpayers get basic rate relief. You can contribute up to £2,880 per year and the government adds £720 (20% relief), giving you £3,600 in your pension. This is called "relief at source."
How do I claim higher rate pension tax relief? +
If you're a higher or additional rate taxpayer with a relief at source pension, claim extra relief through your Self Assessment tax return. Enter your gross pension contributions (including basic rate relief) in the pension section. The extra relief is given as a reduction in your tax bill or added to your refund.
What happens if I exceed the annual allowance? +
Contributions exceeding your annual allowance (including any carried forward) are subject to the Annual Allowance Charge. This is added to your tax bill at your marginal rate. For large excess amounts, you may be able to use "Scheme Pays" to have your pension scheme pay the charge.
Do employer pension contributions count towards my annual allowance? +
Yes, employer contributions count towards your £60,000 annual allowance. However, employer contributions are not subject to National Insurance, making them very tax-efficient. Consider salary sacrifice arrangements where you give up salary in exchange for employer pension contributions.
Is pension inheritance taxable? +
If you die before 75, your pension can pass to beneficiaries tax-free (within the lump sum allowance of £1,073,100). If you die at 75 or older, beneficiaries pay income tax on withdrawals at their marginal rate. Pensions are outside your estate for inheritance tax purposes.

Related Calculators

Pension Calculator

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Income Tax Calculator

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Take Home Pay Guide

Salary after tax and pension

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Understanding Your Results

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  • Instant calculations - Results appear immediately
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  • 2025/26 updated - Using current rates and regulations
Common Questions

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People Also Ask

You must file a Self Assessment tax return if you're self-employed earning over £1,000, have income over £100,000, earn untaxed income like rental or investment income, or are a company director. Deadline is 31 January for online filing.

Most employees are on 1257L for 2024/25, reflecting the £12,570 personal allowance. If you have multiple jobs, secondary employment uses BR (basic rate) code. Check your code on payslips or via HMRC online.

Maximise pension contributions (reduces taxable income), use your ISA allowance (tax-free savings), claim work-from-home relief if eligible, make gift aid donations, and ensure you're using all available allowances.

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