How much tax will you pay on your pension?

You can now take up to 100% of your pension fund as a cash payment.  Any amount in excess of 25% of your fund will be subject to income tax at your marginal rate. This can mean you will have to pay higher rate tax, at 40% or possibly 45%, on some of the cash you take.

You can use our Tax Calculator to see how much tax you will pay if you withdraw your whole fund in one go.  Click on the FREE Report and Guidance button to get a report with useful guidance and advice on how to minimise you tax liability.

We can help you minimise the amount of tax you pay, so why not contact us today and find out how we can save you paying too much tax on your pension.

This information is provided as information only and is intended as a guide and is based on our understanding of the current tax rules.  We will provide you with more specific advice when we send you a detailed report and recommendations.



But what is your marginal rate and how will this affect any other income?

Your marginal rate of tax is based on your TOTAL level of income between the 6th April and the 5th April the following year.  Each year you are given a personal tax allowance, normally £11,000 (based on the 2016/17 tax year).  Which means you can earn up to this amount before you start paying tax.  Any income over and above this limit will be taxed at the following rates:

From £11,000 to £43,000 – 20%

From £43,000 – £150,000 – 40%

From £150,001 plus – 45%

Because taking cash from your pension, over and above the 25% tax free allowance, will be classed as INCOME you should be aware that you could easily slip into a higher tax bracket and end up paying more tax.  For example if you are currently earning £20,000 a year gross and have a pension pot of £60,000 and decide to take the whole lot as cash you will receive £15,000 tax free (25% of the fund) with the remainder being taxable.  Your OVERALL taxable income for the year will therefore be £20,000 + £45,000 = £65,000.  That means you will be paying 40% tax on a large proportion of your pension!

Even if you think you aren’t anywhere near the higher rate tax bracket you need to consider what is classed as ‘taxable’ income and what will count towards your overall annual income.  The following are classed as sources of taxable income:

  • Money you earn from your employment.
  • Profit if you are self employed.
  • Most pensions, including the state pension, company and personal pensions and annuities.
  • Interest on savings and pensioner bonds.
  • Property rental income.
  • Benefits you get from your job (including company cars, health insurance)
  • Income from a trust.
  • Dividends from company shares.


and the following state benefits are also classed as sources of taxable income

  • Job Seekers Allowance
  • Carers Allowance
  • Employment and Support Allowance (contribution based)
  • Incapacity Benefit (from the 29th week you receive it)
  • Bereavement Allowance
  • Pensions paid by the Industrial Death Benefit scheme
  • Widowed Parents Allowance
  • Widow’s Pension

When you are considering taking your pension as cash you need to consider the tax implications of doing so and find out if you can take your whole pension as cash in the most tax efficient way.  At Albion Pensions we are fully aware of the tax implications of taking your pension as cash, although we aren’t authorised or regulated to give you tax advice, we can help you and guide you to take your pension as tax efficiently as possible and minimise the amount of tax you have to pay.

Use our tax calculator to find out how much tax you could pay if you took your whole pension fund as cash.