Tax and your pension
Whether you’re still paying into your pension or planning for retirement, this page explains all the important information you need to know about paying tax.

Contents
Tax relief
One of the benefits of your scheme is the tax relief you receive on your pension contributions if you’re a UK taxpayer.
Each month, your contributions are deducted from your earnings before tax. This means you automatically get tax relief at your highest rate of tax. So, if you pay tax at a rate of 20%, every £1 you contribute only costs you 80p net.
Annual allowance
Your pension is tax free up to a certain limit, known as your annual allowance.
Your Annual Allowance (AA) is the total amount of pension savings you can make each year before you incur a tax charge.
The standard annual allowance limit is £60,000. This is the maximum amount of money you can build up each year across all your pension schemes – including any workplace, personal or stakeholder pensions you may have (also including AVCs, APCs and added pension).
Most people aren’t affected by the annual allowance because their pension savings don’t increase by more than £60,000 in a year. But depending on your circumstances (like being a high earner), you could be affected.
Tax on your retirement benefits
When you retire, your pension will be taxed, depending on what benefits you receive and their value:
Your annual pension counts as part of your earnings and works in a similar way to any other income. This means you will have to pay income tax on it if you exceed your personal allowance (£12,570 for most people).
Remember, if you have other sources of income as well as your pension, they all contribute to your tax payments. For more information about paying income tax, visit the the Government website.
As part of your pension, you have the option to take up to 25% of the capital value of all your benefits as a tax-free lump sum – up to a limit of £268,275 (lump sum allowance).
This Lump Sum Allowance (LSA) is spread across all your pension savings, including any pension lump sums you have already taken.
Most people will not be affected because the maximum lump sum they can take is much lower than this limit. But if you have a large pension, the new limits may affect you.
How do we check if your lump sum is within the tax-free limits?
If you wish to take a lump sum as part of your workplace pension, we check how much LSA you have already used up and how much you have remaining.
We request information about lump sum payments you may have received from any private or occupational pension schemes and work out how much of your lump sum can be taken as a tax-free amount.
How is tax paid on my pension when I retire?
Tax is automatically deducted from your pension payments each month. When you receive your first pension payment, a temporary tax may be applied if we don’t have your up-to-date tax code. So, you may initially pay more tax than you need for the current tax year.
Once your pension is in payment, HMRC will notify us of your correct tax code. You will then receive a refund, as long as the tax code provided by HMRC is given in the same tax year and on a cumulative basis.
You can also claim a refund for any tax you overpay by registering for HMRC online services or contacting HMRC directly.
Tax on your pension when you die
One of the benefits of your workplace pension is that it provides financial protection to the people you care about in the event of your death – either in the form of a lump sum (death grant) or an ongoing income (survivor’s pension), which may be taxed.
A death grant is a one-off lump sum payment your chosen beneficiaries receive in the event of your death. This is usually tax-free as long as:
- You are under age 75 at the date of death.
- The death grant is paid within two years of notifying us of the death.
- You have not exceeded your Lump Sum and Death Benefit Allowance (LSDBA). The LSDBA is set at £1,073,100 and limits the amount of tax-free cash that can be taken by an individual and paid to beneficiaries when they die.
If you have a surviving spouse, civil partner, eligible cohabiting partner or child/children, at the time of your death, they would usually be entitled to receive a percentage of your regular pension income.
Survivor’s pensions are counted as earned income and so the person/s receiving it will have to pay income tax on it.
Important
If you have questions about paying tax on your estate when you die, you should speak to a solicitor or independent financial adviser.