Tax-free lump sum calculator
A quarter of your pension can usually be taken as a tax-free lump sum, up to a lifetime cap. This shows your tax-free cash and the tax on anything above the allowance.
How the 25% rule works
When you start taking a defined-contribution pension you can normally draw a quarter of it free of income tax. This is often called the pension commencement lump sum. The cap on it is the lump sum allowance, £268,275, which is the most tax-free cash you can take across all your pensions in your lifetime. That figure is a quarter of the old £1,073,100 lifetime allowance, and it has been frozen since April 2024.
Worked example
On a £400,000 pot, 25% is £100,000. That is well under the £268,275 allowance, so the whole £100,000 comes out tax-free. The remaining £300,000 stays invested and is taxed as income only when you draw it. You would only pay tax on the lump sum itself if 25% of your combined pots came to more than £268,275, which needs pots of over about £1.07 million.
Above the allowance
If your tax-free entitlement would breach the allowance, the part above it does not vanish, but it is taxed as income at your marginal rate rather than paid tax-free. For most people this never bites. It matters mainly for large pots, or where earlier lump sums have already used up much of the allowance.
Common questions
How much of my pension is tax-free?
You can normally take 25% of a pension pot as a tax-free lump sum, up to the lump sum allowance of £268,275 across all your pensions. On a £400,000 pot that is £100,000.
What is the lump sum allowance?
It is the total tax-free cash you can take from all your pensions in your lifetime, frozen at £268,275 since April 2024. Once you have taken that much tax-free, any further lump sums are taxed as income, even if 25% of the pot would be more.
Do I have to take the whole 25% at once?
No. You can take the tax-free cash in stages, a portion each time you make a withdrawal, or all at once. Taking it gradually can suit people who want to keep more of the pot invested, but the total tax-free amount is the same either way.
Is the tax-free lump sum really tax-free?
Yes, the 25% within the allowance has no income tax and no National Insurance. The other 75% stays in your pension and is taxed as income when you draw it later. Anything above the allowance is taxed as income at your marginal rate.