Do I Pay Income Tax on Pension Withdrawals? — UK Guide 2026/27

Most pension withdrawals are taxed as income. Only the first 25% of your pension pot is tax-free. The remaining 75% is added to your income and taxed at your marginal rate — but careful planning can significantly reduce the amount you pay.

Pension Tax at a Glance: 2026/27

How Pension Withdrawal Tax Works

When you access a defined contribution pension under the flexi-access drawdown rules, each withdrawal is split:

• 25% is tax-free (pension commencement lump sum element)
• 75% is taxable — added to all other income in the tax year

The tax is collected via PAYE, applied by your pension provider, as if the pension were employment income. You will receive a P60 from your provider at the end of the tax year confirming the income paid and tax deducted.

Worked Example: Three Withdrawal Strategies

Helen, aged 64, has a pension pot of £240,000 and no other income.

Option 1: Take the whole pot in one year

• Tax-free: £60,000
• Taxable: £180,000
• Tax: Personal allowance (£12,570 @0%) + £37,700 @20% (£7,540) + £129,730 @40% (£51,892) = £59,432
• Take-home: £180,578

Option 2: Take £30,000/year for 8 years

Each year:

• Tax-free portion: £7,500
• Taxable: £22,500
• Tax: £22,500 – £12,570 (personal allowance) = £9,930 @20% = £1,986/year
• Total tax over 8 years: £15,888

Spreading the withdrawals saves Helen approximately £43,500 in Income Tax.

Option 3: Take only the personal allowance each year (lowest income)

Draw £16,760/year: £4,190 tax-free + £12,570 taxable (fully covered by personal allowance). Tax: £0. Pot lasts approximately 18 years at this rate assuming 4% growth.

The State Pension and Pension Withdrawals

The State Pension uses part of your personal allowance. In 2026/27, the full new State Pension is £12,547.60/year (£241.30/week, confirmed for 2026/27). This consumes almost all of your £12,570 personal allowance.

If you take pension income on top of the full State Pension:

• You have only £22.40 of personal allowance remaining
• Everything above that is taxed at 20% (or higher)

Many retirees are surprised to find their pension income is all taxed at 20% even though the amounts seem modest — because the State Pension has already used most of the personal allowance.

Combined income example

Robert, aged 67, receives:

• State Pension: £12,548/year (£241.30/week)
• Pension drawdown: £12,000/year (£3,000 tax-free + £9,000 taxable)
• Total taxable income: £12,548 + £9,000 = £21,548
• Tax: (£21,548 – £12,570) × 20% = £8,978 × 20% = £1,796/year

The Emergency Tax Problem

The first withdrawal from a pension provider who does not hold a current tax code will trigger HMRC emergency tax on a Month 1 basis. This treats the one-off payment as if it were a monthly salary — massively over-deducting tax.

To reclaim, use the correct form:

Submit online at HMRC’s website or by post. Refunds typically arrive within 30 days. If you do not claim, HMRC will refund automatically at the end of the tax year via Self Assessment or an end-of-year reconciliation — but this can take longer.

Pension Income and Self Assessment

You do not usually need to complete a Self Assessment tax return for pension income alone — HMRC collects the tax via PAYE through your pension provider. However, you must complete a Self Assessment if:

• Your total income (including pension) exceeds £100,000 (personal allowance tapering applies)
• You receive income from multiple pension providers or multiple sources
• You have untaxed income over £2,500
• You are self-employed as well as drawing pension income

See our pension lump sum guide, pension drawdown guide, and self-assessment guide.

How Drawdown Is Taxed

How pension drawdown is taxed

The 25% tax-free rule

Every defined contribution pension pot has a 25% tax-free entitlement (taken as a pension commencement lump sum, or as the tax-free part of an uncrystallised funds pension lump sum), subject to a lifetime cap of £268,275 (the lump sum allowance, 2024/25 onwards).

You can take the 25% in different ways:

Which to choose? Phased drawdown / UFPLS is typically more tax-efficient because it spreads your tax-free entitlement evenly, rather than creating a large taxable withdrawal all at once.

Income tax on the taxable portion

After your tax-free amount, all withdrawals are taxed as income in the year received:

Warning: Withdrawals that push your total income above £100,000 cause your personal allowance to taper at £1 for every £2 above £100,000. This creates an effective 60% marginal rate, a very expensive trap for people withdrawing large amounts in a single year.

Worked examples

Example 1: Retiree with no other income

Age: 66, just reached State Pension age
Pension pot: £250,000 (25% already taken tax-free = £62,500)
Remaining taxable pot: £187,500
State Pension: £12,547.60/year
Target drawdown: £20,000/year

Income each year:

• State Pension: £12,547.60
• Drawdown withdrawal: £20,000
• Total income: £32,547.60

Tax calculation:

• Personal allowance: £12,570 → £0 tax on first £12,570
• State Pension uses: £12,547.60 of the allowance (£22.40 remaining personal allowance)
• First £22.40 of drawdown: 0% (uses remaining personal allowance)
• Remaining £19,977.60 of drawdown at 20% = £3,996 tax

Net annual income: £32,547.60 − £3,996 = £28,552

Example 2: Retiree with salary from part-time work

Salary from part-time work: £18,000
Pension drawdown withdrawal: £12,000 (after 25% tax-free)
Total income: £30,000

Tax:

• Personal allowance: £12,570
• Taxable income: £30,000 − £12,570 = £17,430 at 20% = £3,486

If the drawdown is removed, tax on salary alone: (£18,000 − £12,570) × 20% = £1,086
Additional tax from £12,000 drawdown: £2,400

Example 3: Higher earner taking too much, too fast

Salary: £45,000
One-off drawdown withdrawal: £30,000
Total income: £75,000

Tax:

• £12,570 × 0% = £0
• (£50,270 − £12,570) × 20% = £7,540
• (£75,000 − £50,270) × 40% = £9,892
• Total tax: £17,432

If instead this person withdraws £15,000 this year and £15,000 next year (with the same salary), they save approximately £6,000 in total income tax.

Drawdown Tax Planning

Making the Most of the Personal Allowance

Your pension income uses the same Personal Allowance as all other income. The strategy:

1. Map out all income sources: State Pension, part-time work, rental income, savings interest
2. Calculate remaining Personal Allowance space after those sources
3. Take pension drawdown up to the PA limit: tax-free income
4. Top up with ISA withdrawals: tax-free regardless of amount

Example: Personal Allowance Optimisation

Margaret receives:

• State Pension: £12,548/year (2026/27 full new State Pension)
• Part-time work: £0 (fully retired)
• Personal Allowance: £12,570

Remaining PA space: £12,570 – £12,548 = £22

Margaret can take only £22/year in pension drawdown at 0% tax before it becomes taxable, the full State Pension now uses up almost all of her Personal Allowance on its own. For any meaningful income beyond that, she uses ISA cash or accepts basic-rate tax on drawdown.

Staying Within the Basic Rate Band

If you need more income than the PA covers, aim to stay within the basic rate band (up to £50,270 total income). Taking income into the 40% band costs roughly twice as much tax.

The Basic Rate Band Strategy

Practical: If your other income is £20,000/year, you have room for £30,270 of pension drawdown at 20% before hitting 40%. Above that, consider leaving the pension growing and drawing from ISA instead.

Pension Drawdown vs ISA Withdrawals

ISA withdrawals are completely tax-free, no limit. This creates a powerful combination:

Strategy: Fill basic rate band from pension, fill the rest from ISA

If you need £60,000/year in retirement and have both pensions and ISAs:

• Take £30,270 pension (0% + 20% blended)
• Take £29,730 from ISA (0%)
• Total tax: ~£3,540 on £60,000 income, effective rate 5.9%

Timing: Sequence of Income Matters

Retire Mid-Year Strategy

If you retire partway through a tax year, you may have already earned a significant employment salary. Taking large pension drawdown in that same year adds to your employment income, potentially pushing you into the 40% band.

Better approach: Retire in April (start of new tax year), take only PCLS and minimal drawdown in the first year, and then draw a full income from the following April.

Death in Drawdown: Inheritance Consideration

• If you die before 75: pension drawdown funds paid to beneficiaries income-tax free (though most unused pension funds become subject to Inheritance Tax for deaths on or after 6 April 2027, under changes confirmed in the Finance Act 2026)
• If you die after 75: beneficiaries pay income tax at their marginal rate on withdrawals

Leaving pension funds undrawn has potential inheritance advantages, especially vs. spending ISA funds and leaving the larger pension pot. However, the confirmed 2027 IHT changes will reduce this benefit for many estates, since unused pension funds will generally form part of the taxable estate from 6 April 2027.

Telling HMRC

When You Must Report Pension Income to HMRC

Most pension income is collected through PAYE, the same system used for employment income. Your pension provider deducts tax before paying you, just as an employer would. In this case, you do not need to do anything extra unless your tax code is wrong.

However, you must take action in the following situations:

Flexible Drawdown and Ad Hoc SIPP Withdrawals

If you take a one-off or irregular withdrawal from a SIPP or flexi-access drawdown, HMRC does not know in advance how much you will take. The pension provider must apply a tax code, and if they do not have your correct tax code on record, they will use an emergency Month 1 basis, which assumes you will take the same amount every month.

This almost always results in overtaxation.

Worked Example

David, aged 62, takes a £30,000 ad hoc withdrawal from his SIPP. His normal income is £8,000/year from a small private pension. Under the emergency Month 1 code, the provider calculates tax as if David earns £360,000/year (£30,000 × 12). He is overtaxed by approximately £8,400.

David submits a P55 form to HMRC (for partial withdrawals where he intends to take more later). HMRC repays the overpayment within 30 days.

Forms to use for SIPP overpayment refunds:

• P55: if you have taken only part of your pension pot
• P53Z: if you have taken the whole pot and have other employment or pension income
• P50Z: if you have taken the whole pot and have no other PAYE or pension income apart from the State Pension

Reporting via Self-Assessment

If you need to report pension income that is not captured through PAYE, you register for self-assessment at gov.uk and include all pension income on your return. Self-assessment deadlines:

• 31 January: online return and payment
• 31 October: paper return

If this is your first year on self-assessment, HMRC will usually contact you, but do not wait to be invited if you know you need to file.

Related Guide

• Early Retirement UK 2026/27 — FIRE, Bridge Years, ISA Strategy and Realistic Targets