Yes – but not all of it.
When you take money out of your pension, usually 25% of it is tax-free. The rest is added to your income for the tax year and taxed like your salary.
This is the case for your Penny Pension. 25% of your funds can be taken tax free and the rest will be taxed as normal earnings.
As of April 2024, there is a new Lump Sum Allowance set at £268,275 per person (the maximum amount of tax free cash you can take from your pension). A nice problem to have if this applies to you!
How does it work?
Let’s say you take out £20,000 from your pension in one year:
The first £5,000 (25%) is tax-free.
The remaining £15,000 is added to your other income and taxed based on your total earnings that year.
Depending on how much you earn, this could push you into a higher tax band – especially if you’re still working.
Income Tax Band | Your income | Income Tax rate |
Your personal allowance | Up to £12,570 | 0% |
Basic Rate | £12,571 - £50,270 | 20% |
Higher Rate | £50,271 - £125,140 | 40% |
Additional Rate | Over £125,140 | 45%
|
*This table is correct as of 14/08/2025
Is my State Pension taxed too?
Yes, the State Pension counts as taxable income, but tax isn’t automatically deducted from it. If it’s your only income, you might not pay any tax (see table above). But if you have other income, like from a Penny Pension or a job, HMRC will calculate any tax due
Top tip
If you’re taking a large pension payment, you might be taxed more than necessary at first (this is called an emergency tax code). HMRC will usually sort it out, or you can contact them directly to claim a refund.
Want to check your tax position?
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