Thousands of Brits slapped with tax bills of up to £100,000 just for accessing their own cash – how to avoid it

THOUSANDS of Brits are being hit with tax bills worth up to £100,000 for accessing their own pension cash. Pensioners need to pay income tax on withdrawals from their retirement pots – and many get caught out with surprise tax bills. Experts are now urging retirees not to take all their pension savings out at once, as this puts them at the biggest risk of a huge tax pay out. Analysis by Standard Life has found Brits fully cashing in pension pots worth £100,000 or more handed over at least £87.2million in tax in just six months. Sign up for the Money newsletter Thank you! Between October 2024 to March 2025, a total of 1,772 people fully cashed in pots worth between £100,000 and £249,000. Each of them were forced to pay out at least £27,400 in tax. A further 392 people took out pension pots worth at least £250,000 all at once. They had to pay minimum estimated income tax bills of £98,700. Some of these people may have ended up paying out even more, because how much you pay in tax is based on your wider income. If you are a basic rate taxpayer with an income of up to £50,270 a year, you pay 20% income tax. Most read in Money Any income between £50,271 and £125,140 is taxed at the higher rate of 40%, while anything above £125,140 is at the 45% additional rate. You can take out 25% of your pot tax-free as a lump sum, and you also don’t have to pay tax on the first £12,570 of your remaining cash. But even with this tax-free help, cashing in your pension pot all at once can still land you with a huge bill. That’s because large withdrawals can quickly push savers into the higher and additional rate tax bands. For example, if you took out £100,000 all at once then £62,430 of that would be taxable, once you’ve excluded your tax-free lump sum and £12,570 personal allowance. That means £24,730 of your money would be charged at the 40% higher rate, and you’d have a total tax bill of £17,432. If you spread the £100,000 withdrawal across five years, your tax bill would drop dramatically. If you took out £20,000 a year instead, you would only ever be charged at the basic rate – and you’d pay just £2,430 in total. That’s a huge saving of around £15,000. Mike Ambery, retirement savings director at Standard Life, said: “For some, taking a larger amount upfront will feel like the simplest option, but it can come with a sting in its tail in the form of a higher tax bill than many expect… “Even relatively small changes to when and how you take money can help more of your savings go towards supporting your life later on.” How to avoid a big tax bill on your pension STANDARD Life's Mike Ambery explains... Watch the £50k and £125k thresholds Income above £50,270 moves into higher-rate tax, and above £125,140 into additional rate. What we often see is that a single withdrawal can push people across both thresholds in one go, which significantly increases the amount of tax they pay. Spreading withdrawals across tax years is one of the simplest ways to manage this more effectively. Importantly, pension flexibility means tax-free cash doesn’t have to be taken in one go. Factor in your state pension A full state pension uses up over 99% of the personal allowance, which means there may be very little tax-free headroom left for other income. As a result, additional withdrawals from a private pension could be taxed from the first pound. It’s an important point that can easily be overlooked when planning retirement income. Don’t take it all at once Withdrawing your entire pension pot in one go is often the most expensive option from a tax perspective. While it can be tempting to take control of the money straight away, doing so can push much of it into higher-rate tax. In many cases, taking withdrawals gradually over time can reduce the total tax paid. Use your tax-free cash carefully Up to 25% of your pension can usually be taken tax-free, but that doesn’t mean it all needs to be taken upfront. Phasing tax-free cash alongside taxable withdrawals can help smooth out your overall tax position. This can be particularly helpful for managing income across different years. Pause and check before you act Decisions about pensions can be difficult to reverse, so it’s worth taking a moment to check the implications before making a withdrawal. Fully withdrawing may also restrict your ability to save into your pension in the future due to the money purchase annual allowance (MPAA) which reduces your allowance if you start taking taxable income from your pension. A quick calculation or a conversation with a specialist can help you understand the potential tax impact. Consider guidance or advice before making decisions If possible, full financial advice can provide a more personalised view based on your circumstances and help you weigh up the trade-offs. There are also free sources of guidance available, such as the government’s Pension Wise service, which can help explain how pensions work and what to think about before accessing your savings. Comment now