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.

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 and a lifetime allowance on the value of your fund.

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.

2015 Remedy - Transitional members who hold Lifetime Allowance Fixed or Enhanced Protection  

When the UK Government introduced lifetime allowance (LTA), they also brought in protections through HM Revenue and Customs (HMRC), including fixed and enhanced protection, that allowed members to keep existing savings limits over the LTA threshold. 

From 31 March 2022 all scheme members who are not already in the 2015 Scheme will be moved and start to accrue pension in that scheme on 1 April. This will impact members who hold fixed or enhanced protection.

HMRC rules dictate that members with fixed or enhanced protection, who move to the 2015 scheme from the 1 April 2022, will lose their protection if they accrue benefits under that scheme. Members will need to decide whether or not they want to retain their protections before 31 March 2022 and should consider taking independent financial advice to aid that decision.

Members who move to the 2015 Scheme and subsequently lose enhanced or fixed protection are required to notify HMRC within 90 days of the loss taking place. Members who start to contribute to the 2015 Scheme on 1 April 2022, will need to notify HMRC by 30 June 2022.

To avoid losing this protection scheme members may wish to opt out of the pension scheme on 1 April 2022. In doing this they will retain any fixed or enhanced protection but will not accrue any further pension entitlement. 

Further information about protections can be found in the HMRC Pensions Tax Manual, in particular the section on protection from the lifetime allowance charge.

Further reading

HMRC Pensions Tax Manual

Quick guide to pensions tax relief for members of the schemes administered by the Scottish Public Pensions Agency.

An outline of how your retirement income is taxed.

Useful reference numbers that pension scheme members may need.