Your personal tax allowance
Your personal allowance is the amount of income you can receive in a tax year before you start paying income tax and the standard personal allowance for the tax year 2022/23 is £12,570.
What counts as an income?
Income includes things like:
- annuity payments
- payments from drawdown
- income from employment
- income from investments
- income from any rental property
- State Pension/Additional State Pension.
How tax is paid on money you take from your pension pot
You can usually take a lump sum of up to 25% of your pension pot tax free. Once you’ve had your tax-free lump sum, any money taken from your pension pot is added to any other income you get in the tax year you take it.
This includes paid work, taxable income from additional pension pots and your State Pension. If at the end of the tax year, you’ve either under or overpaid on tax, it’s your responsibility to sort it out with HM Revenue and Customs (HMRC).
If you have an annuity, HMRC usually gives your pension provider your tax code. Your provider will then take off the tax you need to pay from your payments before they’re paid to you.
The tax treatment depends on your individual circumstances. Your circumstances and tax rules may change in the future.
Separate pension pots that are valued up to £10,000 are referred to as Small Pots.
You can take up to three separate personal pension small pots or unlimited occupational pension small pots all in cash. When you do this, 25% of what you take is tax free, and the balance is taxable at your marginal rate of income tax. We’ll deduct 20% tax but if you are liable to more or less tax you need to contact HMRC to pay any extra tax due or claim a refund.
If you take all of your pension as cash and it isn’t a ‘small pot’ or if you only take a Partial Pension Encashment then similarly 25% is tax free, and the balance is taxable at your marginal rate of income tax. However, we will deduct emergency tax which could be higher than your liability to tax and you will need to contact HMRC to claim any refund. If you are due any extra tax you will need to contact HMRC to pay any extra tax.
What happens if I am seriously ill?
If you are seriously ill you may be able to take your full pension as cash tax-free. Seriously ill means you have been diagnosed with less than a year to live. If you think this applies to you please call us on 0345 835 6644 to discuss further before progressing with your choice.
Calculate your tax
If you take all or some of your pension as a partial pension encashment, then you’ll get 25% tax-free and pay tax on the rest. To find out how much tax you might pay, use our cash lump sum tax calculator.