How much tax will I pay on my pension if I’m still working?

Pensions and income tax

25% of your pension pot can be withdrawn tax-free. How you withdraw money from your pension will determine whether you pay tax on the other 75% now or later.

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The tax rate applied to taxable income will depend on your resulting income tax band, and whether you earn any other income.

Income tax personal allowances

The Personal Allowance is the amount you can earn each year before paying income tax.

This is set at ^{_personal_allowance_top} for the year ^{_current_tax_year_yyyy_yy} (6 April to 5 April).

If you withdraw from your pension while you’re still working, you won’t pay tax on the first ^{_personal_allowance_top} of your combined employment and pension income.

Personal Savings Allowance

If you receive income from personal savings, you may not have to pay tax on all of it depending on your income tax band. This is called your Personal Savings Allowance.

You won’t pay tax on the first:

• ^{_basic_rate_personal_savings_allowance} if you’re a basic rate taxpayer;
• ^{_higher_rate_personal_savings_allowance} if you’re a higher rate taxpayer; and
• ^{_additional_rate_personal_savings_allowance} if you’re an additional rate taxpayer.

If your total annual income is less than the ^{_personal_allowance_top} Personal Allowance, your Personal Savings Allowance is increased to £6,000.

If your overall income is below the ^{_personal_allowance_top} Personal Allowance you’re also entitled to the ^{_starting_rates_for_savings_income} ‘starting rate for savings’ of ^{_personal_allowance_rate}, on top of the ^{_basic_rate_personal_savings_allowance} Personal Savings Allowance.

Income from more than one source

Many people close to retirement often have multiple sources of income. Each of these types of income are taxed differently.

You’ll also need to complete a tax return if you earn more than £100,000 in full-time employment.

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How much tax will I pay?

You only pay tax on the taxable part of your income that remains after allowances have been deducted.

The resulting amount will determine your income tax band, and therefore the amount of tax you’ll need to pay.

Income tax bands

Income earned during the ^{_current_tax_year_yyyy_yy} tax year is taxed at:

• ^{_personal_allowance_rate} on income up to ^{_personal_allowance_top};
• ^_basic_rate on income from ^{_basic_rate_bottom} to ^{_basic_rate_top};
• ^_higher_rate on income from ^{_higher_rate_bottom} to ^{_higher_rate_top}; and
• ^{_additional_rate} on income over ^{_higher_rate_top}.

If you earn £40,000 from all your taxable sources of income, you’ll pay £5,485 income tax (£0 on the first ^{_personal_allowance_top} and £5,485 on the amount from ^{_basic_rate_bottom} to £40,000).

Example 1

You receive £70,000 in a year:

• £50,000 comes from taking out 25% of your £200,000 pension tax-free and leaving the rest invested; and
• £20,000 comes from employment.

You pay £1,485 in tax, because:

• there’s no tax due on the pension income;
• there’s no tax due on the first ^{_personal_allowance_top} of your salary; and
• you pay ^_basic_rate tax on your salary between ^{_basic_rate_bottom} and £20,000.

You’re left with £68,515 after income tax has been deducted from your salary (you’ll still need to pay National Insurance on your salary).

Example 2

You receive £70,000 in a year:

• £24,000 comes from drawing down £2,000 from your pension each month (25% tax-free and 75% taxable);
• £30,000 comes from employment; and
• £16,000 comes from renting out a property.

You pay £13,032 in tax, because:

• there’s no tax due on 25% (£6,000) of your pension drawdown;
• your remaining pension, employment, and property income is £64,000;
• there’s no tax due on the first ^{_personal_allowance_top} of your combined income;
• you pay ^_basic_rate tax (£7,540) on your income between ^{_basic_rate_bottom} and ^{_basic_rate_top}; and
• you pay ^_higher_rate tax (£5,492) on your income between ^{_higher_rate_bottom} and £64,000.

You take home £56,968 after tax. If you think you’ve paid too much tax, you can claim a tax refund (also called a rebate) from HMRC by filling out a R40 form.

Income tax bands in Scotland

If you live in Scotland, the amount of tax you’ll need to pay will be calculated differently:

• ^{_personal_allowance_rate} of income up to ^{_personal_allowance_top};
• ^{_scot_starter_rate} of income from ^{_scot_starter_rate_bottom} to ^{_scot_starter_rate_top};
• ^{_scot_basic_rate} of income from ^{_scot_basic_rate_bottom} to ^{_scot_basic_rate_top};
• ^{_scot_intermediate_rate} of income from ^{_scot_intermediate_rate_bottom} to ^{_scot_intermediate_rate_top};
• ^{_scot_higher_rate} of income from ^{_scot_higher_rate_bottom} to ^{_scot_higher_rate_top};
• ^{_scot_advanced_rate} of income from ^{_scot_advanced_rate_bottom} to ^{_scot_advanced_rate_top}; and
• ^{_scot_top_rate} of income over ^{_scot_advanced_rate_top}.

If you earn £40,000 from all your taxable sources of income, you’ll pay around £5,597 income tax (£0 on the first ^{_personal_allowance_top}, £438 on the amount from ^{_scot_starter_rate_bottom} to ^{_scot_starter_rate_top}, £2,337 on the amount from ^{_scot_basic_rate_bottom} to ^{_scot_basic_rate_top}, and £2,822 on the amount from ^{_scot_intermediate_rate_bottom} to £40,000.

Figuring out exactly how much tax you need to pay can be tricky. You may find using an Independent Financial Adviser (IFA) helpful if you’ve got multiple sources of income.

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Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2025