We’ve recently been asked recently whether a pension lump sum can be taken tax free and, if so, how much.
Please note that we cannot give you advice on whether it would be appropriate for you, in your particular circumstances, to take a lump sum from your pension pot. However, if you have sought financial advice from your independent financial advisor and feel this is appropriate then please read on.
As long as you are 55 or over (rising to 57 or over from 6 April 2028), then you can take a lump sum equivalent to 25% of your pension pot without paying income tax. For example, if your pot is £60,000 then you can take £15,000 tax free. This is applicable up to a maximum tax free lump sum is £250,000.
You may find that the lump sum is taxed through PAYE. Don’t worry if this happens as we can reclaim the overpaid income tax as part of your self assessment.
If you don’t otherwise need to submit a self assessment tax return, you can wait for HMRC to carry out their annual review of your tax position and make the tax refund. However, if you don’t want to wait that long for your refund then you can complete an online form P55 which can be found using this link:
https://www.gov.uk/government/publications/flexibly-accessed-pension-payment-repayment-claim-p55
Taking the tax free does not use your £12,570 personal allowance which enables you to earn £12,570 without paying income tax.
If you need help with this, or with other advice, then please get in touch with our accounting team.