No matter what size your pension pot is, you have the option to take all of it, or a portion of it, out in one go as a lump sum. With 25% of your total pension being tax-free, the amount of your pension lump sum you’ll have to declare to HMRC depends on how much you withdraw.
For example, if you have £80,000 in your pension pot and decide to take it all out as a lump sum, only £20,000 will be tax-free. You’ll have to declare the remaining £60,000 as income and pay the relevant taxes. If, however, you prefer to take a £2,000 lump sum from your pension pot every month, you’ll instead pay tax on £1,500, while the leftover £500 will remain tax-free.
After the 25% tax-free amount, all of your pension pot is taxable, and you will need to declare it as income. Whatever the amount is, it’ll be added to your total annual earnings so that you’re taxed correctly. If you’ve retired and are receiving your state pension, your tax band will depend on how much you’re withdrawing from your pension. If you’re working and receiving a taxable pension, combining the two amounts to determine your total income could push you into a higher tax band.
