25% Pension Tax-Free Lump Sum: Keep More Money | Sarah Explains
A saver with a £100,000 pension can usually take £25,000 tax-free, but if they take the rest as cash in one go, that withdrawal can be taxed as income and the full pension pot can even push them into a higher tax band.
The number that matters
The central number is 25%: the usual tax-free share of a UK pension lump sum, subject to a maximum tax-free lump sum of £268,275 across all arrangements.
How it quietly costs you
The first quiet cost is income tax on the remaining 75% of the withdrawal, because only 25% is usually tax-free and the rest is treated as pension income at your marginal rate.
If a person takes a large lump sum, the payment itself can also push them into a higher Income Tax band, and MoneyHelper warns that at least 75% of each lump sum is usually counted as income.
Old vs better: the tax-free element is still 25%, but taking the rest as a staged income stream rather than all at once can reduce the chance of paying a higher marginal rate on a large one-off withdrawal; HMRC’s rules make clear the taxable part is charged in the tax year it is paid.
The second, compounding trap
The second layer is loss of tax efficiency from breaching thresholds, especially once a withdrawal is large enough to interact with allowance rules or temporary/emergency tax coding.
GOV.UK says you may owe extra tax at the end of the tax year if you take a large amount from your pension, which means the immediate deduction can understate the final bill.
A large withdrawal can also be taxed through a temporary (emergency) rate if HMRC has not supplied the provider with your tax code, which increases the risk of an over-deduction and a delayed refund.
What this looks like in practice
Sarah, 58, is a marketing manager earning £62,000 a year, with a £180,000 defined contribution pension and 7 years until retirement.
She would discover:
- Taking a £45,000 lump sum means £11,250 is usually tax-free and £33,750 is taxable, because 25% is tax-free and 75% is income.
- If that withdrawal is added to her salary, it can push part of the cash into a higher Income Tax band, because the taxable portion is treated like ordinary income.
- If her pension provider uses an emergency tax code, the initial deduction can be too high and she may have to wait until after the tax year to reconcile the overpayment.
The full cost of doing nothing
For Sarah, taking the whole taxable portion of one £45,000 withdrawal at once could mean the combined effect of income tax on the £33,750 taxable slice plus any band creep and temporary over-deduction, rather than spreading the tax over multiple years.
The modelling basis is simple: the first 25% is tax-free, the remaining 75% is taxable in the year paid, and any larger withdrawal is taxed under normal Income Tax rules with possible emergency coding.
What to do about it
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Check your tax-free cash allowance in your pension portal and compare it with the legal cap of £268,275.
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Log into your pension provider’s retirement or withdrawal section.
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Find your projected tax-free lump sum or “PCLS” figure.
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Compare it with the maximum allowed across all pensions.
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Good looks like: your expected tax-free cash is at or below your available allowance and you know how much of your pot would be taxable.
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Estimate the tax on a lump sum using MoneyHelper’s retirement tax guidance before you withdraw.
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Open MoneyHelper’s pension tax guidance.
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Work out how much of your withdrawal is the taxable 75% slice.
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Check whether the withdrawal would move you into a higher Income Tax band.
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Good looks like: you can see the after-tax cash before you request the withdrawal.
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Verify whether your provider will use an emergency tax code before you take the money.
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Ask your pension provider how they will tax a flexible lump sum.
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Confirm whether HMRC has already issued the correct tax code.
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Check whether the payment will be treated as a one-off taxable pension payment.
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Good looks like: you know the expected net payment and whether a later refund is likely.
A myth worth clearing up
Myth: “The whole 25% is always tax-free, no matter how big the withdrawal is.”
Fact: The usual tax-free amount is 25%, but it is capped at £268,275 across your pensions, and anything above the allowance is taxed as income.
Sources
Researched 2026-08-10.
Corrections & disclosure: an AI-assisted, human-reviewed guide. Every figure is dated and sourced above. Spot something out of date or wrong? Tell us and we’ll correct it — corrections are noted here and in the video description.
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