Are UK pensions taxed twice?

Question

I, like many, have a workplace pension. I pay taxes through PAYE and file a self assessment covering all other income. My understanding is that your personal pension pot is 25% tax free then you pay income tax on the remaining 75% (please correct if wrong here).

Question: Given that I already paid income tax through my salary, am I being taxed for the same money again if/when I take out my pension payments in the future? To be clear, I am not talking about taxing capital gains on pension pot investment, strictly the income from the actual money put in the pot.

Answer 1

Short answer: no…

When you pay into a a defined contribution pension (for example a SIPP), you get income tax relief at source. Usually this happens in one of two ways:

1. Your employer makes the contribution from your pay before income tax is applied; or
2. Income tax is reclaimed on your contributions after you have made them. First, the pension scheme provider routinely claims back any basic rate income tax you would have paid on the amount that you contributed; this amount usually arrives in your pension a few weeks after the contribution. Then, if you are a higher-rate or additional-rate taxpayer, you get the remaining tax relief through self-assessment, i.e. when you enter the total of your pension contributions on your tax return.

So no, it is not taxed twice – unless you make a mistake with your tax return.

Or unless, as Ganesh points out in comments, you exceed your Annual Allowance, in which case you can't reclaim the income tax on the excess.

And the other barrier to watch out for is the Lifetime Allowance (LTA) – breaching this can make contributions highly tax-inefficient – but that's a complex matter and a different question/answer.

So, bearing in mind these two caveats, with income tax relief on the way in and the 25% tax-free lump sum option on the way out, pensions in the United Kingdom are generally regarded as tax-efficient, providing you successfully navigate the rules.