Tax on a £500,000 pension withdrawal — additional rate territory.
How much tax will you pay on a £500,000 pension withdrawal? See the full tax breakdown across all bands including the 45% additional rate.
A £500,000 pension withdrawal in a single tax year is an exceptional event that will attract the highest rates of UK income tax. With UFPLS treatment, £125,000 is tax-free and £375,000 is taxable. Combined with state pension, your total taxable income exceeds £387,000 — well into the 45% additional rate band which starts at £125,140. You will have no personal allowance, and a large portion of the withdrawal will be taxed at 45%. The total tax bill could exceed £140,000, meaning you receive less than £360,000 of the original £500,000. Phasing this over 10 years at £50,000 per year could save £40,000-£60,000 in total tax. There is also a strong case for considering whether you need to withdraw at all — pension funds sit outside your estate for inheritance tax purposes, so keeping money invested in your pension can be a powerful estate planning tool. Seek professional advice before proceeding.