How you pay tax on your pension

Pensions are a tax-efficient way of saving. In the simplest terms, a pension is a way of holding back some of the money you earn during your working career so that you’ll have a source of income in the future when you’re no longer working.

In order to encourage people to put part of their income aside for the future, pension contributions get tax relief from the government. Effectively, that means that some of the money you’d otherwise have paid in tax goes towards your pension instead.

Under current tax legislation the permitted limit on the tax-free lump sum is the lower of, either:

  • 25% of the capital value of your benefits after commutation, or
  • £268,275 

Pensions also provide some tax incentives when you take benefits in the future. For example, under current tax legislation, you can take up to 25% of the value of your fund as a tax-free lump sum when you retire.

Because of the tax advantages offered by the government, there are some limitations placed on pension saving, including an annual allowance on the amount you can contribute.

The pages in this section provide a quick guide to the basics of pension taxation. If you need further information or individual tax planning, you should speak to a qualified tax expert.

Further reading

HMRC Pensions Tax Manual 

Click the header above for a quick guide to pensions tax relief for members of the schemes administered by the Scottish Public Pensions Agency.

Click the header above for an outline of how your retirement income is taxed.

Click the heading above for useful reference numbers that pension scheme members may need.