After years of savings, the last thing you want to worry about is paying tax on pension withdrawal. But when you retire, you might be surprised to find that a large chunk of your pension is taxed. It is understandable to expect that the money you have saved will provide the comfortable retirement you deserve, but taxes can get in the way.
With the right strategies, you can reduce or even avoid some taxes on your pension.
In this guide, we’ll break down how to manage your pension so that more of it stays in your pocket. You will get answers to the questions like: Why am I paying so much tax on my pension? And can I start my pension at 55 while still working?
By the end of this article, you’ll have a clear idea of how to avoid paying tax on your pension.
How to Avoid Paying Tax on Your Pension
Unfortunately, it’s not possible to avoid paying tax on pension withdrawal entirely, but you can definitely minimise the amount you pay in tax by following certain strategies.
These are some of the legal and effective ways to minimise or avoid tax on pension withdrawals.
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Take Your Tax-Free Pension Lump Sum Smartly
Upon your retirement, you can typically take up to 25% of your pension pot as a tax-free lump sum. This is known as the Pension Commencement Lump Sum or PCLS. There is a limit of £268,275 across all your pensions for this tax-free withdrawal.
So if your pension is worth £100,000, you could withdraw £25,000 without paying any tax.
After you take your tax-free lump sum, the remaining amount is taxed when you start withdrawing it. To make the most of your pension, consider leaving the rest invested. By doing this, you can take smaller amounts over time and keep your tax bill lower.
However, if you take out a large sum all at once, you might end up in a higher tax bracket, which means you’ll pay more tax.
Remain Within the Personal Allowance
All persons in the UK have a Personal allowance. In 2025/26, the normal personal allowance is £12,570. In case your total income (pension income, wages, and other sources) remains less than £12,570, you are not entitled to pay any tax.
Receive a Pension Over Some years
Instead of taking a big amount as a single lump sum, you can opt to take a smaller drawdown over some years. This is used to distribute the tax burden, and it will put you in a lower tax bracket. This is called the ‘income drawdown’ system, which is usually the most tax-efficient path towards acquiring a pension.
Keep an Eye on Your Tax Band
A question that comes to mind is, why am I paying 40 per cent tax on my pension? The reason is that your overall income, including pension and any other income, has pushed you up to the higher tax band.
In 2025/26, you’ll pay:
- 20% on income between £12,571 and £50,270
- 40% on income between £50,271 and £125,140
- 45% on income over £125,140
Remember to take the amount you need so as not to exceed £50,270.
Delay Retirement or Phase Retirement
You can delay your pension later than 55 (or 57 by April 2028). In case you do not need the pension income at the time when you are still working, it will be helpful to defer it. Your pension fund is growing tax-free.
This way, you do not need to mix up pension money with salary. Otherwise, you would fall into a higher tax bracket.
If your spouse or partner has a lower income or unused personal allowance, you can potentially reduce your household’s overall tax bill by strategically managing your pension contributions and withdrawals. This could involve:
- Contributing to your spouse’s pension: This can be tax-efficient, especially if they are a lower earner or if you have already maximised your own contributions. These contributions can also attract tax relief, potentially reducing your taxable income.
- Strategically withdrawing from each partner’s pension in retirement: By withdrawing from both partners’ pensions, you can make use of each person’s Personal Allowance and basic-rate tax band. This helps keep the overall tax bill lower by avoiding higher tax bands.
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What Is the Most Tax-Efficient Way to Get a Pension?
Begin with contributions. You have a tax relief on your current annual allowance of £60,000 in 2025/26, or 100% of earnings, whichever is less. Pay in through salary sacrifice where possible, as it lowers the National Insurance as well.
To draw money, a flexi-access drawdown allows you to get the 25% tax-free lump sum immediately, and then get the income as required. This keeps the rest invested, which may grow tax-free within the pot.
Annuities offer stable income, which means that the payments that exceed the lump sum are taxed.
The hybrid solution is usually the best. To make large expenditures, use tax-free cash; otherwise, maintain your personal allowance and basic-rate band (£12,571 to £50,270) to prevent the 40 per cent tax band.
Should you be married or in a civil partnership, if one partner has unused Personal Allowance and the other is a basic-rate taxpayer, you may be able to transfer £1,260 of the unused allowance via the Marriage Allowance, saving up to £252 in tax for the couple.
How to Beat the State Pension Tax Trap?
The state pension tax trap occurs when your state pension reaches or exceeds the £12,570 personal allowance, causing any additional income to become taxable once the allowance is fully used. In 2025/26, the new state pension is £11,973. Any income above this threshold could trigger tax.
To avoid the state pension tax trap, manage your total income carefully. If your personal pension is flexible or in drawdown, you only need to withdraw enough to complete the top-up without pushing yourself into a higher tax band.
You can also make additional money in tax-free savings accounts, such as ISAs, which aren’t subject to income tax, making them a useful tool for topping up your income.
If possible, consider delaying your state pension. It increases by 1% every 9 weeks you defer, up to 5.8% annually. You can then take it later when your income from other sources reduces.
For couples, it may be beneficial to coordinate income streams, such as from personal pensions and other sources, to maximise the use of both partners’ personal allowances, reducing the overall tax burden.
Be aware of the frozen personal allowance, which will remain at £12,570 until 2028, potentially worsening the state pension tax trap.
Contributions to pensions during your working life can reduce your taxable income. However, once you retire, it’s important to pay attention to efficient pension drawdown strategies to minimise tax liability. Professional advice is crucial in this regard.
Can I Take My Pension at 55 and Still Work?
Yes, you can take your pension at 55 and still work. This is possible due to the ‘pension freedoms’ introduced in 2015. But you should also be aware that the age you can first access your pension will increase to 57 in April 2028.
If you have a defined contribution pension, you can continue working and making contributions. However, taking flexible income or large lump sums can trigger the Money Purchase Annual Allowance (MPAA), reducing your annual pension contribution limit from £60,000 to just £10,000.
For defined benefit schemes, check your scheme’s rules, as they may have specific requirements or reductions for early access.
Taking your pension while working adds to your total income and could push you into a higher income tax bracket, so careful planning is essential to avoid unnecessary tax.
The Bottom Line: How to Avoid Paying Tax on Your Pension
Now you have the answer to your question, “How to avoid paying tax on your pension”. Paying tax on your pension is inevitable, but with smart planning, it can be kept to a minimum. The key is to manage your income, make use of available allowances, and avoid the state pension tax trap.
Therefore, it is always best to plan with the help of a qualified financial advisor so you get the most out of your retirement income, without giving too much away in taxes.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.