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Original poster

Tax on pension lump sum

27 replies

CountingQuiche · 29/12/2025 14:20

Hope that this is a fairly straightforward question.

I have a work pension that is currently untouched.
I want to take out a small lump sum.
I have received the information from the pension people.
25% of the lump sum is tax-free.
Tax is payable on the rest (tax calculated at circa £1k)

I don't currently pay any tax. We are both retired and live off my husband's savings/pensions/investments. I have £20k in an ISA in my name.

Will I be able to claim this tax back?
If so, how do I do it?
I have never filled in a tax return or had anything to do with HMRC.

TIA

OP posts:
SalmonOnFinnCrisp · 29/12/2025 14:23

Not enough info.

How much is a small lump sum?
How much is the pension in total?

I ask as i dont think you understand the pension rules...

You can take 25% of your pension savings tax-free when you access your pension.

This means up to 25% of the total pot can be drawn down tax free.... it doesn't mean only 25% of the lump sum you draw down is tax free

Original poster
CountingQuiche · 29/12/2025 14:46

Thanks for responding.

Pension is worth about £120k

I don't want to access my pension (as in get regular payments).

I want to withdraw a one-off sum of approx 6K.

The statement I have received says that 25% of that 6k will be tax free, and they will deduct 20% tax on the remainder of that 6K. I just wanted to know if I can claim that tax back as I am not currently paying any tax IYSWIM.

OP posts:
Algoquick · 29/12/2025 14:58

20% tax will be deducted from full amount (£6k) as pension provider doesn’t know your tax status. You can claim the £900 back using form P55.

This assumes you’ve no other taxable income (personal allowance is £12,570). Note also that once you start withdrawing from your pension, you can’t contribute more than £10k to it in a year.

PeopleTheyAintNoGood · 29/12/2025 14:58

You are correct. If you chose this option though, be aware that the whole pension will be on the same basis. Ie you cannot later ask for a 25% tax free lump sum, instead it will need to be each withdrawal is 25% tax free with the rest taxable.

As your total withdrawal will still be under your personal allowance, you can request the tax rebate yourself from HMRC

loveawineloveacrisp · 29/12/2025 15:00

Why will it be taxed? 25% of the 120k can be taken tax free. Them's the rules.

PhilandKirst · 29/12/2025 15:05

loveawineloveacrisp · 29/12/2025 15:00

Why will it be taxed? 25% of the 120k can be taken tax free. Them's the rules.

You can choose whether to take the whole tax free lump sum upfront or to have 25% of each amount you take be tax free. For op, the way she’s doing it makes sense as it preserves more of her tax free entitlement (she won’t pay tax either way).

GOODCAT · 29/12/2025 15:15

Husband took a small amount from his pension earlier this year, he paid tax on 75% and nothing on the 25% and can't claim the tax back until the end of the tax year. It is easy to misunderstand, we did. Keep asking questions until you are certain you understand the consequences.

loveawineloveacrisp · 29/12/2025 15:15

I still don't follow. OP can take 6k as a partial 25% tax free lump sum.

Original poster
CountingQuiche · 29/12/2025 15:36

@Algoquick Thank you - that's exactly the information I was asking for.

Thanks to everyone else that has responded too.

OP posts:
saveforthat · 29/12/2025 15:42

@Algoquick is not correct. If you are using the lump sums option, only 75% of the lump sum will be taxed and yes, if you are a non tax player (even when the 75% is added to the rest of your taxable income, you can claim it back.

saveforthat · 29/12/2025 15:46

PeopleTheyAintNoGood · 29/12/2025 14:58

You are correct. If you chose this option though, be aware that the whole pension will be on the same basis. Ie you cannot later ask for a 25% tax free lump sum, instead it will need to be each withdrawal is 25% tax free with the rest taxable.

As your total withdrawal will still be under your personal allowance, you can request the tax rebate yourself from HMRC

This is incorrect. The pension remains uncrystallised and the rest of the tax free cash can be taken later if required. Op can I suggest you look at the options on Moneyhelper?

Original poster
CountingQuiche · 29/12/2025 15:47

@saveforthat

But that is what algoquick said?

OP posts:
saveforthat · 29/12/2025 15:50

CountingQuiche · 29/12/2025 15:47

@saveforthat

But that is what algoquick said?

No they said 20% would be deducted from the whole amount £6K. Have a look at this.
https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/taking-your-pension-as-a-number-of-lump-sums

LivingInMinecraft · 29/12/2025 15:51

People are getting confused.

You can withdraw a tax free lump sum of 25% (of a maximum of £268k). Then any further withdrawals will be subject to normal taxation per your income tax code;

OR

You can choose ALL drawdowns from your pension to have 25% tax free and 75% taxable, until you’ve either had 25% of your entire pension pot (at the point of crystallisation) tax free/ had a maximum of £258k tax free.

LivingInMinecraft · 29/12/2025 16:00

If your pension is currently untouched @countingquiche you can choose to withdraw this £6k lump sum with NO income tax on it, and later withdraw the rest of the tax free lump sum (i.e. £120k x 25% = total tax free lump sum of £30k so £24k to withdraw tax free later) and the remaining £90k (plus any later capital growth) will be taxed at your current tax rates.

OR you can choose to make 25% of ALL withdrawals from the £120k whenever you take them tax free, which will mean only 25% (£1.5k) of this £6k withdrawal will be taxed free, and the other 75% of it (£4.5k) will be subject to your normal income tax rates, but future withdrawals will ALL be 25% tax free, not just the next £24k).

The ultimate amount withdrawn tax free is the same either way (assuming you do withdraw it all before you die!) BUT the total amount of tax you actually pay with each method may vary depending what tax rates are at the time, your other income and how much of the taxable proportion of the pension pot you are withdrawing in each tax year.

If you don’t currently pay any tax and this £6k won’t take you over the tax threshold then the latter option may be preferable but that depends entirely on what you expect your future income to be when you access the rest of the pot. You need to plan your withdrawals so that you can establish which will be the most tax efficient withdrawal method for you given any other income you may be receiving when you access the rest of the pot. And you need to be clear about which method you are choosing to use.

Also: accessing the tax free lump sum ONLY does not limit future pension contribution levels, but making other withdrawals DOES.

If in doubt, consult an IFA.

Chasingsquirrels · 29/12/2025 16:02

TOP TIP
If you are going for drawdown with 25% tax free and remainder taxable (but in your situation your taxable income will be below the annual allowance) then you should.

  1. Request a very small 1st payment amount. This will be taxed as already mentioned in the thread.
  1. Once the RTI submission has gone in for the payment HMRC should issue a tax code to the pension provider (if they don't then you can ring them and request one).

You should then have enough personal allowance on the PAYE coding allocated to the pension provider that the 75% won't be taxed at source.

Application may depend on timings, if you took a one off payment in April (M1) you may find yourself still being taxed. Whereas spreading it through the year or taking it in March (M12) should enable the personal allowance to be allocated.

This is just a timing measure, the tax on the 75% will be reclaimable if your taxable income is below the personal allowance.

Original poster
CountingQuiche · 29/12/2025 16:07

@saveforthat

Thank you for clarifying, I have just reread their post and you are correct. I think I was mixing that post up with what @GOODCAT posted.

OP posts:
Chewbecca · 29/12/2025 16:12

Just also checking - you are at least 55?

Original poster
CountingQuiche · 29/12/2025 16:27

@Chewbecca yes, I am in my mid-sixties.

OP posts:
loveawineloveacrisp · 29/12/2025 20:53

LivingInMinecraft · 29/12/2025 16:00

If your pension is currently untouched @countingquiche you can choose to withdraw this £6k lump sum with NO income tax on it, and later withdraw the rest of the tax free lump sum (i.e. £120k x 25% = total tax free lump sum of £30k so £24k to withdraw tax free later) and the remaining £90k (plus any later capital growth) will be taxed at your current tax rates.

OR you can choose to make 25% of ALL withdrawals from the £120k whenever you take them tax free, which will mean only 25% (£1.5k) of this £6k withdrawal will be taxed free, and the other 75% of it (£4.5k) will be subject to your normal income tax rates, but future withdrawals will ALL be 25% tax free, not just the next £24k).

The ultimate amount withdrawn tax free is the same either way (assuming you do withdraw it all before you die!) BUT the total amount of tax you actually pay with each method may vary depending what tax rates are at the time, your other income and how much of the taxable proportion of the pension pot you are withdrawing in each tax year.

If you don’t currently pay any tax and this £6k won’t take you over the tax threshold then the latter option may be preferable but that depends entirely on what you expect your future income to be when you access the rest of the pot. You need to plan your withdrawals so that you can establish which will be the most tax efficient withdrawal method for you given any other income you may be receiving when you access the rest of the pot. And you need to be clear about which method you are choosing to use.

Also: accessing the tax free lump sum ONLY does not limit future pension contribution levels, but making other withdrawals DOES.

If in doubt, consult an IFA.

Edited

Yes. This is my understanding. Hence my previous confusion.

Puddingpiper · 29/12/2025 21:04

I’m a financial adviser 25% of your pot can be accessed as a tax free lump sum therefore you could take the full 6k as a tax free lump sum or £1500 tax free and £4500 taxable (if you are a non tax payer then likely the latter makes more sense). You will likely pay emergency tax on the £4500 you can reclaim this using a P55 form (most likely others are used in some circumstances)

would be worth an appointment with an IFA to discuss as you may benefit if you are unsure how pension tax works or your options. There are many many nuances to our pension limits and rules

bumpintheroad · 29/12/2025 22:00

if you currently have no income and will be getting full state pension in a year or two you may want to consider taking more of your pot now so you use your taxable allowance. For example taking £16k now you’d get £4k tax free and the £12k taxable wouldn’t be taxed as under the threshold. The state pension takes up most of the tax allowance so once you start getting it you’d pay tax on the £12k. I know it’s not always good to withdraw from an invested pension if you don’t need it but if would save £2400 tax plus interest from your isa it’s worth considering

messybutfun · 29/12/2025 22:01

LivingInMinecraft · 29/12/2025 16:00

If your pension is currently untouched @countingquiche you can choose to withdraw this £6k lump sum with NO income tax on it, and later withdraw the rest of the tax free lump sum (i.e. £120k x 25% = total tax free lump sum of £30k so £24k to withdraw tax free later) and the remaining £90k (plus any later capital growth) will be taxed at your current tax rates.

OR you can choose to make 25% of ALL withdrawals from the £120k whenever you take them tax free, which will mean only 25% (£1.5k) of this £6k withdrawal will be taxed free, and the other 75% of it (£4.5k) will be subject to your normal income tax rates, but future withdrawals will ALL be 25% tax free, not just the next £24k).

The ultimate amount withdrawn tax free is the same either way (assuming you do withdraw it all before you die!) BUT the total amount of tax you actually pay with each method may vary depending what tax rates are at the time, your other income and how much of the taxable proportion of the pension pot you are withdrawing in each tax year.

If you don’t currently pay any tax and this £6k won’t take you over the tax threshold then the latter option may be preferable but that depends entirely on what you expect your future income to be when you access the rest of the pot. You need to plan your withdrawals so that you can establish which will be the most tax efficient withdrawal method for you given any other income you may be receiving when you access the rest of the pot. And you need to be clear about which method you are choosing to use.

Also: accessing the tax free lump sum ONLY does not limit future pension contribution levels, but making other withdrawals DOES.

If in doubt, consult an IFA.

Edited

It’s not an either/or.

You can take any number of uncrystallised fund pension lump sums and later all remaining tax-free cash only.

This would make sense if you don’t have taxable income now but will in the future.

It is also now no longer in most people’s interest to retain any tax-free cash post the age of 75.

littlebilliie · 29/12/2025 22:06

Please seek financial advice as there are some mistake being made

Quercus5 · 30/12/2025 09:18

Your pension will be worth more if you withdraw it as lump sums while you’re not paying tax. If you leave it where it is and draw it down after you have reached state pension age then you will need to pay tax on it. It’s worth sitting down and doing the sums.