Taxable income can include:
- employment;
- pensions;
- savings; and
- property.
You won’t have to pay tax on:
- The first £12,570 of total income per year.
- Up to £6,000 of savings income per year.
- Up to 25% of your personal pension drawdowns (exact amount will vary depending on withdrawal method).
How much tax you’ll pay is calculated based on total income minus allowances.
Pensions and income tax
25% of your pension pot can be withdrawn tax-free.
How you withdraw money from your pension will determine whether you pay tax on the other 75% now or later.
| Pension withdrawal method | Tax due |
|---|---|
| Take all of it as cash | Pay tax on 75% of the amount withdrawn. |
| Take some of it as cash and leave the rest invested | Choose how much of it you wish to draw from the tax-free part. |
| Take 25% of it as cash and buy an annuity with the rest | Choose whether to take everything from the tax-free part or a combination of tax-free and taxable. |
| Take smaller amounts as and when you need it | Choose whether to withdraw from the taxable or tax-free part with each withdrawal (or a combination of both). |
| A mix of the above | Varies. |
The tax rate applied to taxable income will depend on your resulting income tax band, and whether you earn any other income.
Income tax personal allowances
The Personal Allowance is the amount you can earn each year before paying income tax.
This is set at £12,570 for the year 2024/25 (6 April to 5 April).
If you withdraw from your pension while you’re still working, you won’t pay tax on the first £12,570 of your combined employment and pension income.
Personal Savings Allowance
If you receive income from personal savings, you may not have to pay tax on all of it depending on your income tax band. This is called your Personal Savings Allowance.
You won’t pay tax on the first:
- £1,000 if you’re a basic rate taxpayer.
- £500 if you’re a higher rate taxpayer.
- £0 if you’re an additional rate taxpayer.
If your total annual income is less than the £12,570 Personal Allowance, your Personal Savings Allowance is increased to £6,000.
If your overall income is below the £12,570 Personal Allowance you’re also entitled to the £5,000 ‘starting rate for savings’ of 0%, on top of the £1,000 Personal Savings Allowance.
Income from more than one source
Many people close to retirement often have multiple sources of income. Each of these types of income are taxed differently.
| Type of income | How it’s taxed |
|---|---|
| Full-time employment | Your employer will deduct tax automatically using Pay As You Earn (PAYE) |
| Self-employment | You pay tax directly to HMRC after submitting a tax-return |
| Personal pension | Your provider will deduct tax automatically |
| State Pension | HMRC will deduct tax automatically |
| Savings (excluding ISAs) | You pay tax directly to HMRC after submitting a tax-return |
| Investments | You pay tax directly to HMRC after submitting a tax-return |
| Rental property | You pay tax directly to HMRC after submitting a tax-return |
You’ll also need to complete a tax return if you earn more than £100,000 in full-time employment.
How much tax will I pay?
You only pay tax on the taxable part of your income that remains after allowances have been deducted.
The resulting amount will determine your income tax band, and therefore the amount of tax you’ll need to pay.
Income tax bands
Income earned during the 2024/25 tax year is taxed at:
- 0% on income up to £12,570.
- 20% on income from £12,571 to £50,270.
- 40% on income from £50,271 to £125,140.
- 45% on income over £125,140.
If you earn £40,000 from all your taxable sources of income, you’ll pay £5,485 income tax (£0 on the first £12,570 and £5,485 on the amount from £12,571 to £40,000).
Example 1 You receive £70,000 in a year:
- £50,000 comes from taking out 25% of your £200,000 pension tax-free and leaving the rest invested.
- £20,000 comes from employment.
You pay £1,485 in tax, because:
- There’s no tax due on the pension income.
- There’s no tax due on the first £12,570 of your salary.
- You pay 20% tax on your salary between £12,571 and £20,000.
You’re left with £68,515 after income tax has been deducted from your salary (you’ll still need to pay National Insurance on your salary).
Example 2 You receive £70,000 in a year:
- £24,000 comes from drawing down £2,000 from your pension each month (25% tax-free and 75% taxable).
- £30,000 comes from employment.
- £16,000 comes from renting out a property.
You pay £13,032 in tax, because:
- There’s no tax due on 25% (£6,000) of your pension drawdown.
- Your remaining pension, employment, and property income is £64,000.
- There’s no tax due on the first £12,570 of your combined income.
- You pay 20% tax (£7,540) on your income between £12,571 and £50,270.
- You pay 40% tax (£5,492) on your income between £50,271 and £64,000.
You take home £56,968 after tax.
If you think you’ve paid too much tax, you can claim a tax refund (also called a rebate) from HMRC by filling out a R40 form.
Income tax bands in Scotland
If you live in Scotland, the amount of tax you’ll need to pay will be calculated differently:
- 0% of income up to £12,570.
- 19% of income from £12,571 to £14,876.
- 20% of income from £14,877 to £26,561.
- 21% of income from £26,562 to £43,662.
- 42% of income from £43,663 to £75,000.
- 45% of income from £75,001 to £125,140.
- 48% of income over £125,140.
If you earn £40,000 from all your taxable sources of income, you’ll pay around £5,597 income tax (£0 on the first £12,570, £438 on the amount from £12,571 to £14,876, £2,337 on the amount from £14,877 to £26,561, and £2,822 on the amount from £26,562 to £40,000.
Figuring out exactly how much tax you need to pay can be tricky. You may find using a financial adviser helpful if you’ve got multiple sources of income.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 06-04-2024
