JILL’S FULL STORY
Jill earns £10,000 a year and her personal allowance is £12,750. She has significant debt and is keen to pay it off before she retires.
She’s planning to take all £40,000 from her pension pot. She’ll get 25% tax-free and despite the tax she’ll have to pay on the other £30,000, it will still leave her with enough to pay off her debts. Although Jill knows this will leave her without any pension income from this pot, she thinks this is a better option for her than paying the interest on her debt.
How we calculated Jill’s tax liability
Jill earns £10,000 a year and her Personal Allowance is £12,570. She also has state pension benefits of £10,600 (based on a weekly state pension of £203.85 for 2023/24). This gives her a total income of £20,600 this year.
Jill wants to take all of her £40,000 pension pot in cash. 25% of this amount, £10,000, will be tax-free, but she’ll need to pay tax on the remaining £30,000.
The £30,000 will be taxed based on the below rates:
| INCOME TAX RATE |
ESTIMATED PENSION INCOME |
ESTIMATED INCOME TAX TO PAY |
|---|
Personal Allowance to be taxed at 0% (on earnings up to £12,570)
|
£0.00
|
£0.00
|
To be taxed at 20% (applies to £12,571 - £50,270)
|
£29,670
|
£5,934
|
To be taxed at 40% (applies to £50,271 - £125,140+)
|
£330
|
£132
|
To be taxed at 45% (applies to £125,140+)
|
£0.00
|
£0.00
|
Totals
|
£30,000
|
£6,066
|
The calculations are based on UK income tax bands. If you are a Scottish or Welsh taxpayer the tax relief you will be entitled to will be at the Scottish or Welsh Rate of income tax as applicable.
End of year tax position
Jill’s taxable income is made up of the remaining £30,000 lump sum from her pension pot and her annual earnings of £10,000, and her state pension benefits of £10,600.
Jill’s total taxable income for the year is £50,600.
This means Jill is due to pay £6,066 in tax, based on current UK rates of tax.
The first time you access your pension flexibly, your pension provider may use an emergency tax code. This could mean that you initially pay more or less tax than expected. To make sure you pay the right amount of tax, you need to contact HM Revenue & Customs (HMRC). Tax treatment depends on your individual circumstances. Your circumstances and tax rules may change in the future.
Read the assumptions we’ve made
Find out what you can take
Take cash from a pension, age 55+ (age 57 from 2028)
