Pension Tax Rules You Should Know in 2025

Ever wonder why your pension pot shrinks when you pull money out? It’s not magic – it’s tax. Understanding the rules can save you hundreds, even thousands, each year.

First up, tax relief. Every pound you contribute gets a boost from the government, usually at your marginal rate. If you’re a basic‑rate taxpayer, that’s a 20% kick‑back; higher rates get even more, as long as you claim it.

Next, the annual allowance. In 2025 the limit is £60,000, meaning you can put up to that amount into all your pension schemes without a tax charge. Anything over that triggers the annual allowance charge, which is essentially a tax on the excess.The lifetime allowance used to be a big hurdle, but it’s been scrapped for new members. Existing members keep a £1.07 million cap, but most people won’t hit it thanks of higher limits and flexible drawdown.

When you retire, you can usually take up to 25% of your pension tax‑free. The rest is taxed as income, so it’s smart to spread withdrawals over a few years to stay in a lower tax bracket.

Avoiding the tax charge is mostly about timing. If you exceed the annual allowance, you can carry forward unused allowance from the previous three tax years – but only if you were a pension saver in those years.

2025 brought two notable tweaks: the tapering of the annual allowance for high earners now starts at £240,000, and the “money purchase annual allowance” (MPAA) remains at £4,000 if you’ve accessed flexibly before.

So what can you do today? Check your contribution history, confirm you haven’t breached the allowance, and consider a strategic withdrawal plan that keeps your taxable income moderate.

Key Tax Limits and How They Affect Your Pension

• Annual allowance: £60,000 (or lower if you earn over £240,000).
• Carry‑forward: use up to three years of unused allowance.
• Lifetime allowance: £1.07 million for existing members, none for new joiners.
• Tax‑free cash: up to 25% of the pot, taken once you’re 55 or older.

Tips to Keep More Money in Your Pocket

1. ‑ Track contributions: a quick spreadsheet can flag excesses before they become a charge.
2. ‑ Use carry‑forward wisely: pull extra contributions into a low‑earning year to maximise the allowance.
3. ‑ Plan withdrawals: aim to stay below the higher‑rate tax threshold each year.

Understanding pension tax rules isn’t rocket science, but it does require a bit of attention. Keep these basics at hand and you’ll protect more of the money you’ve worked hard to save.