How Much of Your Pension Can You Take Tax Free?
Creator of Pensions Explained and Femme Finance. She holds a SIPP and writes from personal experience of managing pensions as a self-employed limited company director.
Pension Lump Sum Tax Free: How the 25% Rule Works in the UK
The pension lump sum tax free entitlement is one of the most valuable features of UK pension saving. You can take up to 25% of your pension pot as a pension lump sum tax free — but there is a lifetime cap on how much that can be, and it applies across all your pensions combined. Understanding exactly how the pension lump sum tax free rules work affects how and when you start drawing down your pot.
The 25% rule
When you start taking money from a defined contribution pension, up to 25% of the pot can usually be taken as a pension lump sum tax free. This is formally called the pension commencement lump sum (PCLS).
Everything above the 25% is taxable as income at your marginal rate in the year you withdraw it.
On a pension pot of £100,000, you can take £25,000 as a pension lump sum tax free. The remaining £75,000 in drawdown or annuity payments would be subject to Income Tax.
On a pot of £400,000, you can take £100,000 tax-free. The rest is taxable.
The Lump Sum Allowance cap
The pension lump sum tax free entitlement has a ceiling.
Since the Lifetime Allowance was abolished on 6 April 2024, the upper limit on pension lump sum tax free cash is set by the Lump Sum Allowance (LSA) of £268,275.
This is a lifetime cap across all your pensions. It doesn't matter how large your pension pot is — once you've taken £268,275 in tax-free cash in total, no further pension lump sums are free of income tax.
The 25% rule operates normally until you reach this cap. A pot of £1,073,100 would generate exactly £268,275 at 25%, which is exactly the cap. For any pot larger than that, the cap bites before the 25% does.
On a pot of £1,500,000: 25% would be £375,000, but the cap limits the pension lump sum tax free amount to £268,275. The remaining £106,725 that would otherwise have been tax-free is instead taxable at your marginal rate.
The cap is cumulative and cross-scheme
The £268,275 is not per scheme or per event. It's a lifetime total, running across every pension you ever hold.
If you took £100,000 in tax-free cash from a previous employer's pension five years ago, your remaining LSA is £168,275. You need to track this yourself across providers. HMRC does not do it automatically.
When you access a pension, your provider will typically ask you to confirm how much of your LSA you've used. If you give an inaccurate figure — because you've forgotten about an earlier scheme — the tax treatment could be wrong, and you'll owe the difference.
Taking tax-free cash in stages
You don't have to take all your tax-free cash at once. There are two main ways to phase it.
Phased drawdown: You can designate part of your pot to drawdown at a time, taking 25% of each tranche tax-free rather than the full 25% from the whole pot in one go. Each tranche you move into drawdown generates a tax-free PCLS from that portion.
UFPLS payments: An Uncrystallised Funds Pension Lump Sum takes money directly from an unaccessed pot, with each payment being 25% tax-free and 75% taxable. It's a way to draw from the pension in chunks without formally moving funds into a drawdown arrangement first.
Phasing can be useful if you want to avoid taking a large single payment in a year when it would push you into a higher tax band. Spreading tax-free cash over multiple tax years, and managing the taxable portions against your Personal Allowance and lower rate bands, can improve the overall tax efficiency of your withdrawals.
Historical Lifetime Allowance protections
Some people who had large pension pots before the Lifetime Allowance was introduced or at various points when it was reduced, applied for formal protections that increased their personal LTA above the standard level.
Under the current regime, these protections can still increase your personal Lump Sum Allowance above £268,275. The mechanism is complex and varies by protection type. If you held Enhanced Protection, Primary Protection, Fixed Protection, or Individual Protection, the effect on your available LSA is worth checking with a pension specialist or through HMRC's guidance.
What happens when you exceed the Lump Sum Allowance
If you take more in tax-free cash than your remaining allowance, the excess is taxed as income. Your pension provider is required to deduct the tax before paying you.
It's not a penalty as such — the money is still yours. You just don't get the tax-free treatment on the amount above the limit. The effect is that anything above £268,275 is taxed at your marginal rate in the year of payment, the same as any other pension income.
Defined benefit pensions and tax-free cash
For defined benefit pensions, the tax-free cash question works differently. You don't simply take 25% of a pot. Instead, you typically commute some of your annual pension income into an upfront tax-free lump sum, according to a commutation factor set by the scheme.
The commutation factor tells you how much annual pension income you give up for each pound of tax-free cash. A factor of 20:1 means giving up £1,000 per year of pension income in exchange for £20,000 tax-free.
Whether that trade is worth making depends on your circumstances, tax position, life expectancy, and the generosity of the scheme's commutation terms. It's one of the more consequential decisions DB scheme members face at retirement.
Key takeaway: The 25% tax-free cash rule is real, but the lifetime cap of £268,275 is what most people with larger pots will hit first. If you have multiple pensions or have already taken tax-free cash from a previous scheme, tracking your cumulative usage against the Lump Sum Allowance is important before you make any further withdrawal decisions.
Frequently asked questions
How much of my pension can I take tax-free?
You can usually take 25% of your pension pot as a tax-free lump sum. However, there is a lifetime cap of £268,275 on how much tax-free cash you can take across all your pensions. Once you've taken £268,275 in total tax-free cash, further lump sums are taxable as income regardless of the 25% rule.
What is the pension Lump Sum Allowance?
The Lump Sum Allowance (LSA) is the maximum tax-free cash you can take from pensions over your lifetime, set at £268,275. It replaced the old 25% of Lifetime Allowance calculation when the Lifetime Allowance was abolished on 6 April 2024.
Can I take my entire pension tax-free?
Only up to 25% (capped at £268,275) is tax-free. Everything above that is taxed as income at your marginal rate. On a £300,000 pot, you'd take £75,000 tax-free and pay income tax on any further withdrawals.
Do I have to take the tax-free cash all at once?
No. You can phase your tax-free cash by accessing your pension in stages. Taking a series of smaller UFPLS payments, for example, means each one is 25% tax-free, spreading the tax-free entitlement over time rather than taking it all in one year.
What if I have multiple pensions — does the £268,275 apply to each one?
No. The £268,275 Lump Sum Allowance applies across all your pensions combined over your lifetime. You need to track how much you've taken tax-free from each scheme. Once the total reaches £268,275, no further tax-free cash is available from any pension.
Not financial advice. This article explains how pensions work in general terms. It is not personal advice tailored to your circumstances. If you need advice about your specific situation, speak to an FCA-regulated financial adviser.
Find an adviser — free initial consultation →Affiliate link — we receive a small commission at no cost to you.
Pension Tax — Complete Guide
UK Pension Tax Rules Explained →