Registered Pension Scheme: UK Tax Relief, Allowances, and Withdrawals

A registered pension scheme is a UK retirement savings arrangement formally registered with HM Revenue and Customs under the Finance Act 2004, and that registration is what unlocks its tax treatment: contributions attract income tax relief, investments grow free of income tax and capital gains tax inside the scheme, and when you draw benefits up to 25% can normally be taken as a tax-free lump sum, with the rest taxed as income. Annual limits govern how much can go in with relief, and separate allowances now cap how much can come out tax-free.

What Registration Means

Section 150 of the Finance Act 2004 sets out the formal registration process with HMRC that a scheme must complete to qualify.¹ Without that status, a pension arrangement sits outside the tax-advantaged wrapper and contributions receive no relief.

Two structures dominate. Occupational schemes are set up by employers for their staff. Personal pension schemes are taken out by individuals, including the self-employed, who save independently. Both must meet HMRC’s ongoing reporting and management requirements to keep their registered status.

Tax Relief on Contributions

Tax relief is the headline incentive. When money goes into a registered pension, HMRC effectively refunds the income tax that would otherwise have been paid on that amount, so every pound contributed costs less than a pound out of pocket.

Relief reaches your pot through one of two mechanisms depending on the scheme:

Relief at source. The provider claims back basic-rate tax at 20% from the government and adds it to your pot. Contribute £80 and the provider grosses it up to £100.²
Net pay arrangement. Your employer deducts contributions from salary before income tax is calculated, so relief comes through at your full marginal rate immediately.²

If you pay tax at 40% or 45% and your scheme uses relief at source, the provider only reclaims 20%. The extra 20% or 25% has to be recovered through your Self Assessment tax return.² This is one of the most commonly missed reclaims in the UK. If you are a higher-rate taxpayer on a relief-at-source scheme and have never filed for it, years of relief may still be sitting there.

Employer contributions are treated separately. They are deductible as a business expense when computing profits for corporation tax, which gives employers a direct incentive to pay in generously.³

The Annual Allowance

The standard annual allowance caps the total pension contributions that qualify for tax relief in a single tax year at £60,000. That includes your own contributions, your employer’s contributions, and the tax relief HMRC adds. Exceed it and an annual allowance charge applies at your marginal income tax rate, clawing back the relief that should not have been given.⁴

Tapered Allowance For High Earners

If your adjusted income exceeds £260,000 and your threshold income exceeds £200,000, the annual allowance tapers. For every £2 of adjusted income above £260,000 you lose £1 of allowance, down to a floor of £10,000. The taper fully bites at £360,000 of adjusted income.⁴

Money Purchase Annual Allowance

Once you flexibly access a defined contribution pension, for example by entering drawdown or taking an uncrystallised funds pension lump sum, a reduced annual allowance of £10,000 applies to future contributions to money purchase schemes. This is the money purchase annual allowance, and it cannot be carried forward.⁴ The practical consequence is straightforward: think carefully before taking flexible withdrawals if you still plan to make significant contributions.

Carry Forward

Unused annual allowance from any of the previous three tax years can be carried forward and added to the current year. You must have been a member of a registered pension scheme in each year you want to draw from, and the current year’s allowance has to be used in full before carried-forward amounts kick in. Carry forward is not available once the money purchase annual allowance has been triggered.

If an annual allowance charge exceeds £2,000, you can ask the scheme to pay it on your behalf under “scheme pays.” The scheme settles the bill with HMRC and reduces your future benefits by a corresponding amount. Any excess is reported through Self Assessment.

Tax-Free Growth Inside The Wrapper

Investments held within a registered pension scheme grow without the drag of annual taxation. Section 186 of the Finance Act 2004 exempts income from investments and deposits held inside the scheme from income tax.⁵ Dividends, bond interest, and rental income from pension-held property all compound untouched. Capital gains on the sale of assets inside the scheme are similarly exempt.

Taking Money Out

The normal minimum pension age is currently 55. From 6 April 2028 it rises to 57.⁶ Anyone born after April 1973 will not reach 55 before the change takes effect and will be caught by the higher age. Some members who joined a scheme before 4 November 2021 may keep a protected pension age of 55 under that scheme’s rules. If you are currently 55 or 56, be aware you could temporarily lose access on 6 April 2028 until you turn 57.

The Tax-Free Lump Sum

The lifetime allowance, which used to cap the total value a pension could reach before penalty charges applied, was abolished on 6 April 2024.⁷ Two new allowances limit tax-free cash instead:

Lump Sum Allowance. The maximum tax-free lump sum you can take across all your pension arrangements is £268,275.⁸
Lump Sum and Death Benefit Allowance. A broader cap of £1,073,100 covering tax-free lump sums paid in your lifetime plus certain lump sum death benefits paid to beneficiaries if you die before age 75.⁸

If you held lifetime allowance protections before abolition, you may have higher individual limits. The practical point: your fund can now grow past £1,073,100 without penalty, but the amount you can pull out tax-free is still capped.

At the point you take benefits, up to 25% of your fund can normally come out as a tax-free lump sum, subject to the £268,275 cap. You can take it as a single payment or in stages, depending on the provider’s rules. Alternatively, you can take uncrystallised funds pension lump sums directly from the pot, with each withdrawal split so that 25% is tax-free and 75% is taxed as income. That approach spreads the tax-free element across multiple withdrawals rather than taking it upfront, but it triggers the money purchase annual allowance.

How the Rest Is Taxed

Everything beyond the tax-free portion is taxed as income in the year you receive it. The provider applies a tax code and deducts income tax through PAYE before the money reaches your bank account, in the same way an employer would with salary.

Large withdrawals can push you into a higher tax band. Someone drawing £50,000 from a pension on top of £20,000 in state pension and other income may find part of that withdrawal taxed at 40% rather than 20%. Spreading withdrawals across multiple tax years keeps more of the fund in lower bands. Providers also commonly apply emergency tax codes on first withdrawals, which can lead to overpayment. Any excess can be reclaimed from HMRC.

Passing The Pension On

The tax treatment of a pension paid to beneficiaries turns primarily on the member’s age at death.

If the member dies before age 75, most lump sum death benefits are paid tax-free, provided they fall within the deceased’s remaining lump sum and death benefit allowance (£1,073,100 minus any tax-free lump sums already taken). The payment must generally be made within two years of the provider being notified of the death.⁹

If the member dies at age 75 or over, beneficiaries pay income tax on what they receive. The provider deducts the tax before making the payment, whether it is taken as a lump sum, through drawdown, or as an annuity.⁹

Inheritance Tax From April 2027

Unused pension funds held in discretionary trust schemes currently sit outside the estate for inheritance tax purposes. That changes on 6 April 2027, when most unused pension funds and death benefits will be brought into the estate’s value for inheritance tax.¹⁰ Where the combined value of the estate and undrawn pension savings exceeds the nil-rate band (currently £325,000), the excess will be subject to inheritance tax at up to 40%.

Some benefits stay outside the change: death-in-service benefits from a registered pension scheme, dependants’ scheme pensions from defined benefit arrangements, and benefits passing to a surviving spouse, civil partner, or registered charity.¹⁰ For anyone with a large pension pot, the 2027 change alters estate planning materially, and the sooner you review your position the better.

Charges That Wipe Out The Advantage

Taking money out outside the approved rules, for example withdrawing before the minimum pension age without qualifying for ill-health benefits, triggers an unauthorised payments charge of 40% on the amount withdrawn. If the unauthorised payment exceeds 25% of the fund’s value, an additional 15% surcharge applies, taking the total to 55%.¹¹ The scheme itself may also face a scheme sanction charge. These penalties exist in part to deter pension liberation scams that promise early access but leave the saver with a catastrophic tax bill.

Transferring a UK registered pension to a Qualifying Recognised Overseas Pension Scheme (QROPS) triggers a 25% overseas transfer charge on the transferred value unless an exemption applies. The main exemptions cover situations where you live in the same country as the QROPS, or where both you and the QROPS sit within the UK, Gibraltar, or the European Economic Area. HMRC monitors these transfers for five full tax years after the transfer date, and if circumstances change during that window the 25% charge can apply retroactively. Both you and the scheme administrator are jointly liable.¹²

1
Legislation.gov.uk. Finance Act 2004, Section 150
2
GOV.UK. Tax on Your Private Pension Contributions – Tax Relief
3
GOV.UK. PTM043100 – Contributions: Tax Relief for Employers: Introduction
4
GOV.UK. Pension Schemes Rates
5
Legislation.gov.uk. Finance Act 2004, Section 186
6
GOV.UK. Increasing the Normal Minimum Pension Age
7
GOV.UK. Lifetime Allowance (LTA) Abolition – Frequently Asked Questions
8
GOV.UK. Tax on Your Private Pension Contributions – Lump Sum Allowance
9
GOV.UK. Tax on a Private Pension You Inherit
10
GOV.UK. Inheritance Tax – Unused Pension Funds and Death Benefits
11
GOV.UK. Pension Schemes and Unauthorised Payments
12
GOV.UK. HS345 Pension Savings – Tax Charges