Learn about how different income sources are taxed in retirement, and use our handy calculator to calculate out how much you’d have to pay.

Pension tax calculator 2022-23

Since April 2015, anyone aged 55 or over has been eligible to cash in their whole pension amount. One MP famously quipped that pensioners were free to squander the lot on a Lamborghini if they wanted to.

Of course, many individuals don’t do this – as it would saddle you with a big tax charge.

In fact, you’d need to cash in a pension worth £415,000 to buy a £288,000 supercar, paying enough tax to buy the Treasury a Porsche (£126,000).

So, Which? has produced a calculator to show you how much tax you’ll pay in the 2022-23 tax year if you take your whole pot, or a piece of it as a lump sum, with an eye to taking more lump sums in future.

You can also view your projected bill for 2021-22, assuming you accessed your pension that year. If you file a tax return, then your 2021-22 self-assessment must be done by 31 January 2023.

How much tax do I pay on a pension lump sum?

From age 55, if you have a defined contribution (DC) pension (where you’ve built up pension savings during your working life), you can receive a 25 percent lump sum tax-free; you can take more, but you’ll pay income tax on anything beyond 25 percent .

If you leave your pot invested and take out lesser sums, ad hoc, you’ll get 25 percent of each withdrawal tax-free.

You can also withdraw up to a fourth of your pension’s value as a one-off tax-free lump payment, but if you do you won’t be able to make any additional tax-free withdrawals in future.

To view all your possibilities, check our guide to cashing in your pension.

Why have I paid emergency tax on my pension?

Tax on pension-pot withdrawals will be taken at source, via the pay-as-you-earn (PAYE) system rather than through a self-assessment tax return.

In many circumstances, the plan provider will need to employ an emergency tax code to do this. This code assumes you receive the same amount each month – and treats the sum you receive as one twelfth of your annual income. More tax than is payable could consequently be deducted.

HMRC will eventually repay the amount, but the procedure could take months unless you actively claim a refund using the applicable HMRC form – P55, P50Z or P53Z  – in which case it should take no more than four weeks.

If your pension provider already knows your tax code for the year, and the right amount of personal allowance you should receive, it can use this instead of an emergency tax code. This implies that there is less chance of overpaying tax and having to claim this back.

Do I pay tax on state pensions?

Contrary to what many people think, the state pension is not tax-free, but the money you get is paid ‘gross’ – without any tax being deducted.

If your total income from all sources, including the state pension, is larger than your tax-free limit, tax is owed on your state pension and this will typically be taken from any private pension or earnings you might have, which are paid through the PAYE system.

However, if you have no PAYE income, you’ll have to prepare a self-assessment tax return and pay any tax payable straight to HMRC.

How do I pay tax on my private pensions?

Income you get from private pensions (either directly from an employer’s pension scheme or from annuities bought with your pension funds) is paid with tax already deducted via PAYE.

Your tax office sends your pension provider(s) your tax code so it knows how much to deduct, but it’s always recommended to make sure you receive a copy of the code for each source of PAYE income to check your tax.

If you don’t obtain copies of all the codes, or do not understand how your tax is being computed, contact HMRC.

contributing to a private pension explained

What about tax on annuities?

Just like ordinary annuities bought with pension fund money, purchased life annuities are insurance products that you can buy with a cash lump sum and they offer an income for life.

But you can buy them at any moment, and the tax treatment of purchased life annuities is different from the tax on an annuity you buy with your pension fund.

Part of the income you get is recognized as a return of your capital and is tax-free. The remaining is paid with tax of 20 percent already deducted.