Question 1

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

Accepted Answer

When you take an Uncrystallised Funds Pension Lump Sum (UFPLS), 25% is tax-free and the remaining 75% is added to your taxable income for the year. The tax you pay depends on your other income and which income tax band the withdrawal pushes you into — 20% basic rate, 40% higher rate, or 45% additional rate. For example, withdrawing £25,000 as UFPLS with £30,000 other income would result in roughly £3,750 in income tax.

Question 2

What is UFPLS?

Accepted Answer

UFPLS stands for Uncrystallised Funds Pension Lump Sum. It is a way of withdrawing money directly from your defined contribution pension without first moving it into drawdown. Each UFPLS payment is 25% tax-free and 75% taxable. It is available from age 55 (rising to 57 in 2028) and can be taken as one lump sum or a series of payments.

Question 3

Is 25% of my pension tax-free?

Accepted Answer

Yes — up to a point. You can normally take 25% of your defined contribution pension tax-free, subject to the Lump Sum Allowance of £268,275. This can be taken as a single lump sum (tax-free cash or Pension Commencement Lump Sum), spread across multiple UFPLS withdrawals (where 25% of each is tax-free), or taken upfront when you move into drawdown. Once you exceed the Lump Sum Allowance, further withdrawals are fully taxable.

Question 4

What is emergency tax on pensions?

Accepted Answer

Emergency tax (also called Month 1 basis) is a temporary tax code that HMRC applies when your pension provider does not have your correct tax code. It treats the withdrawal as if you receive that amount every month, often resulting in a much higher tax deduction than you actually owe. You can reclaim the overpaid tax by submitting form P55 or P53 to HMRC, or it will be automatically reconciled at the end of the tax year.

How much tax will you pay on a pension withdrawal?