How pensions are taxed: contributions, withdrawals and inheritance.
Separate tax relief paid into a pension from the tax on money coming out. Worked examples and links to the calculation for each task.
Start with the direction of the payment
Paying into a pension, taking retirement income and inheriting a pension involve different tax calculations. A contribution calculator cannot tell you the tax on a withdrawal. An income-tax calculation does not establish whether an inheritance is outside the estate.
This guide uses 2026/27 rules unless stated otherwise. Numerical salary examples use England, Wales and Northern Ireland. Scottish Income Tax, overseas residence and unusual scheme arrangements need separate treatment.
Tax relief on pension contributions
Under relief at source, a provider adds basic tax relief to an eligible personal payment. With net pay, the contribution is deducted before Income Tax is calculated. Salary sacrifice exchanges contractual salary for an employer pension contribution; it can change the National Insurance calculation as well as Income Tax. These methods do not give identical payroll results.
The contribution tax-relief calculator keeps pension credit, tax effects and personal cost separate. It assumes salary-only income, no existing pension payments and eligibility for the method entered. It does not check the annual allowance or Scottish tax.
Source: HMRC pension tax-relief methods.
Worked example: £800 paid is not a £600 personal cost
An eligible basic-rate saver pays £800 under relief at source. The provider adds £200, so the pension receives £1,000. The saver has spent £800. Subtracting the provider’s £200 from that cash cost again would count the same relief twice.
Higher-rate relief depends on which income bands the gross contribution affects. It is not necessarily one flat percentage of the whole payment. Where a further claim is needed, follow HMRC’s claim route.
Net pay and salary sacrifice: a like-for-like illustration
Assume £60,000 annual salary, a £6,000 annual gross contribution, standard 2026/27 allowances and category A employee NI below State Pension age. There is no other income or pension contribution.
| Annual result | Net pay | Salary sacrifice |
|---|---|---|
| Pension receives | £6,000 | £6,000 |
| Income Tax reduction | £2,400 | £2,400 |
| Employee NI reduction | £0 | £120 |
| Modelled personal cost | £3,600 | £3,480 |
The sacrifice case leaves salary above the employee NI upper earnings limit, so the NI difference uses 2%. An employer’s NI reduction is separate: it is not automatically added to the pension. The example excludes allowance charges and uses annualised NI, which can differ from payroll rounding. Minimum-wage rules and salary-linked benefits also need checking.
Sources: Income Tax bands, National Insurance rates and salary-sacrifice rules.
Annual allowance, taper and carry forward
The standard annual allowance is £60,000, but a lower allowance can apply. The calculation includes employer contributions and, for defined benefit pensions, the measured growth in benefits rather than simply the employee’s payments. Relevant-earnings limits for personal tax relief are a separate test.
Unused allowance from the previous three tax years may be available subject to the carry-forward conditions. High income and flexible pension access can change the limits. A provider accepting a payment does not establish that no tax charge arises.
Use the annual allowance guide, carry-forward explanation and tapered allowance guide for those distinct questions.
Source: HMRC annual allowance.
What is the Money Purchase Annual Allowance?
Taking taxable income through flexi-access drawdown normally triggers the £10,000 Money Purchase Annual Allowance for defined contribution saving. Qualifying tax-free cash alone normally does not. This can matter when retirement income and continuing contributions overlap.
The MPAA guide explains the trigger and contribution distinction. Check the scheme’s notice and official rules rather than assuming the normal annual allowance still applies.
Source: HMRC annual allowance after flexible access.
Tax-free cash and pension withdrawals
Cash is usually limited to 25% of the benefits being accessed and the available lump-sum allowances. The standard lump sum allowance is £268,275 across your pensions. Previous payments, protections and scheme rules can change the amount; 25% is not a promise that every pension withdrawal is a quarter tax-free.
The taxable part of a pension payment joins other taxable income for the year. Larger withdrawals can cross tax bands. The amount deducted by a provider on an individual payment and the final annual tax liability can differ.
Sources: GOV.UK tax-free pension payments and tax when receiving a pension.
For the investment balance after withdrawals, use the drawdown guide and comparison. Its results are gross, not spendable income after tax. For a liability illustration, the retirement Income Tax tool states its own supported assumptions.
Is the State Pension taxable?
Yes. State Pension is part of taxable income, although the payment itself normally arrives without Income Tax deducted. Whether there is tax to pay depends on total income and available allowances, not solely on the pension’s weekly rate.
Keep State Pension, private pension and earnings separate when gathering your annual figures. Use your award or forecast rather than assuming the full State Pension applies.
Source: GOV.UK pension income and tax.
Adjusted net income and the “60% tax trap”
The Personal Allowance is reduced by £1 for every £2 of adjusted net income above £100,000. Eligible pension contributions can affect adjusted net income, but the treatment depends on the contribution method. The interaction can create an effective 60% marginal Income Tax rate within the allowance-taper range for England, Wales and Northern Ireland.
A contribution reducing tax is not automatically affordable or suitable. Check contribution limits, access restrictions and other circumstances alongside any tax illustration. Our allowance-taper tool covers that separate task; use the contribution planner for a chosen future pot target.
Source: HMRC adjusted net income.
Scottish taxpayers
Scottish rates on non-savings, non-dividend income differ. Do not substitute an English marginal rate into a Scottish pension-relief calculation. Check each tool’s scope: the contribution tax-relief tool on this site currently excludes Scottish Income Tax.
Source: HMRC pension tax relief, including Scotland.
Pension inheritance: separate Income Tax from Inheritance Tax
Death-benefit tax depends on the pension and payment type, the age at death, applicable deadlines and allowances. A general statement that everything is tax-free before age 75 leaves out important conditions. Ask the scheme to identify the benefit and its treatment; do not apply an ordinary withdrawal calculation to it without checking.
For Inheritance Tax, HMRC’s technical note published on 27 August 2026 confirms that reforms legislated in Finance Act 2026 bring most unused pension funds and pension death benefits into the estate from 6 April 2027. That future treatment is separate from the rules applying to a death before that date. Exceptions and implementation details matter.
This change does not establish a universal order in which someone should spend their pension, ISA or other assets. The personal tax position and future needs require a broader assessment.
Source: HMRC pension Inheritance Tax technical note 2. Follow GOV.UK pension-tax guidance for the official inherited-pension route.
Records to have ready
- Tax year, tax residence and the tax code used by payroll or the pension provider.
- Personal payments, the relief method and the gross amount credited.
- Employer contributions and any defined benefit pension-input statement.
- Previous flexible-access notices, allowance records and cash already taken.
- State Pension, other taxable income and the amount and date of any withdrawal.
The aim is to establish the inputs and applicable rules. General information and calculator outputs do not constitute a recommendation to contribute, withdraw, transfer or select a pension product.
Sources checked 12 September 2026. For a personal recommendation, use appropriately authorised advice; HMRC and scheme administrators can help establish the tax and scheme records.