HMRC has clarified the rules around taking a lump sum from your pension, confirming that the 25% tax-free amount can be accessed more than once. The revenue department also referenced a "month one" rule that pensioners should consider when calculating their tax liability.
A pensioner in their 60s contacted HMRC via social media seeking clarification about their pension withdrawals, having already used up their tax-free lump sum. They wanted to determine the correct tax treatment of their payments.
What HMRC said about multiple lump sums
HMRC provided general guidance that could be useful when planning retirement income. It said: "You can take your 25% tax-free pension amount more than once by using phased drawdown or taking multiple smaller lump sums from a single pot, or by accessing multiple separate pension pots."
You are entitled to withdraw up to 25% of any pension pot's value as a tax-free lump sum. Across all your pension schemes combined, the maximum you can extract this way is £268,275.
These lump sum withdrawals become available from age 55, which is the point at which you can begin accessing your pension savings. However, this access age is set to rise to 57 in April 2028.
Income tax rates and personal allowance
You can earn up to £12,570 each year without paying income tax. Once your income moves above this, you pay 20% on income between £12,571 and £50,270, 40% on income between £50,271 and £125,140, and 45% on income above £125,140. This applies in England, Wales and Northern Ireland.
Another rule to note is that once your income moves above £100,000, you start to lose the £12,570 personal allowance. You lose £1 of the allowance for each £2 you earn above £100,000, so you lose it entirely when your income reaches £125,140.
From April 2028, the state pension age will increase to 67. Currently, the state pension age is being phased up from 66 to 67, with the transition taking place gradually between April 2026 and April 2028.
How lump sums are taxed above 25%
HMRC also explained how your lump sum is taxed if you take out an amount above the 25% limit. It said: "If you're taking a pension lump sum, the first 25 per cent is tax free and the remaining is taxed on a week 1 month 1 basis."
The idea of a week one month one tax calculation is that the amount is taxed in isolation, not taking into account any other earnings or tax you have paid that year. You will usually pay income tax at your marginal rate on any lump sum you take out above the 25% threshold.
