Tax on pension drawdown
You can usually take up to 25% of your pension pot tax free when you either:
- Move it into drawdown
- Take it as any other kind of retirement income
Any money you take beyond that 25% will be taxed as income. Once your money’s in drawdown, any money you access will be included in your annual income for tax purposes.

How much tax will I pay on my pension when I’m in drawdown?
To find out, you’ll need to work out how much your total taxable income is for that year. You can then see how your drawdown income affects it. When you’re working that out, bear in mind that:
- Most people have a standard personal allowance of £12,570. That first part of your income will probably be tax free. Any income above it will be taxable.
- Your taxable income can include anything from rent on a property or wages from a job to cash from your State Pension, an annuity or any other retirement income source.
- How much income tax you pay depends on your total income, which tax band you fall into, how each band is taxed that year and where in the UK you live (income tax bands and rates are different in Scotland). Find out more at GOV.uk’s income tax page.
- Taking drawdown income payments could push you into a higher tax band (particularly if you take one or more larger payments in a single year), so you’ll have to pay more tax.
Want to learn more about tax?
If you’re looking forward to retirement, it’s good to know the best way to take your money without paying too much tax on your pension savings.
How do I pay tax on my pension drawdown?
Your pension provider will take any tax from your drawdown income payment before it’s paid out. It’s just like when an employer takes tax off a salary payment.
When you take your first withdrawal, you’ll probably be taxed using an emergency tax code. That could mean you overpay. If that happens, you’ll get a refund after the end of that tax year. You might also be able to claim it back during the year. Visit the HMRC site to find out how to claim a tax refund when you’ve taken a pension lump sum. It’s also very important to remember that tax rules can change and are subject to your personal circumstances. So be sure to get up-to-date guidance or advice on the tax implications of any drawdown decisions you’re making.
What’s the relationship between drawdown and my tax-free cash?
Once you’re able to access your pension savings, you can usually take up to 25% of them as tax-free cash. That’s usually when you reach the age of 55 (rising to 57 from April 2028). Here are some important points to bear in mind if you’re thinking about doing that:
- You can usually take up to 25% of the value of your pension when you start accessing it. So if you start with £100,000, you could take up to £25,000 tax-free.
- Your tax-free 25% can never go into drawdown – if you move your whole pension pot into drawdown without accessing this portion, you will lose this entitlement.
- There’s an upper limit on how much tax-free cash you can take of £268,275 (the Lump Sum Allowance). To reach that, you’d need over a million pounds in the combined value of your pension pots, so it doesn’t affect most people.
- You only pay tax on any money you put into drawdown when you take it as income. You don’t have to pay tax on any gains in its value while it’s still invested.
- If you transfer some or all of your pension savings into drawdown, you’ll usually get your 25% up front. Note that you don’t have to put all of your savings into drawdown in one go. Here's how that could look:
Sarah has a £10,000 pension pot and wants to move it into drawdown. She chooses to take 25% of it as tax free cash - giving her a tax free cash lump sum payment of £2,500. She moves the remaining £7,500 into drawdown. She's now used all of her tax free cash allowance for this particular pension pot.
Mark also has a pension pot of £10,000, but he only needs £2,000 of his tax free cash right now to cover some unexpected costs. He decides to move £6,000 of his pension savings into drawdown and leave £2,000 in his pot, to hopefully keep growing. A few years later Mark decides to take the remaining £2,000 out of his pension pot and move it into drawdown. Before he does that, he accesses his 25% tax free cash allowance that he still has available from the money he has left in his pension pot.
How will drawdown affect my benefits?
Moving money from your pension pot into drawdown won’t affect your means-tested benefits entitlement. But receiving tax-free payments or drawing down lump sums (i.e. income payments) could do, possibly making a difference to a number of means-tested benefits, including:
- Universal Credit
- Housing Benefit
- Pension Credit
- Employment and Support Allowance
- Income Support
- Jobseeker’s Allowance.
If you’re receiving these or any other means-tested benefits, make sure you understand exactly how any pension payments could affect them. If the benefits you receive also have capital test requirements, it's important to think about how you access your tax-free cash. Most of the benefits mentioned above have a capital restriction of around £16,000, so accessing your tax-free cash may push your savings over this amount.
What should I think about before accessing my tax-free cash?
Important questions to ask yourself include:
- How much money do I really need right now?
- Taking too much money could needlessly increase your income tax bill. And it’ll no longer be invested, so depending on how markets perform, it might not grow with the rest of your pension pot (though of course its value could go down as well).
- Where will I put the money when I access it?
- You might be taking quite a large sum – and you might not need all of it straight away. So it’s worth doing some advance planning to make sure any money you’re putting to one side goes into the most efficient place.
- How will other income affect tax on money I draw down?
- As noted above, your drawdown income counts towards your total taxable income once you’ve used up your 25% tax free allowance. It’s very important to have a sense of how much that is so you’ll know how much tax you’ll be paying.
- What if I want to carry on contributing to my pension?
- If you want to make contributions into your pension after you’ve started taking an income, you’ll be restricted to paying in a maximum of £10,000 each tax year. This is known as the Money Purchase Annual Allowance (MPAA). While this won't be triggered by accessing your tax free cash, it will begin when you take an income from your drawdown pot.
What should I do next?
If you’re thinking about accessing your pension savings, it’s important to seek guidance or advice.
- If you’re aged 50+, you can book a free appointment with Pension Wise. They’re an impartial guidance service from MoneyHelper.
- You can talk to a financial adviser at any age, though you’ll probably have to pay for their advice. If you don’t already have one, you can find one at Unbiased.
- We also offer a Retirement Advice service for over 55s, that will give you tailored financial advice for your retirement.
They’ll help you think through your longer-term options. For example, certain types of retirement income product are only available once you’re 55+. And they’ll also talk you through the up-to-date tax implications of any pension pot choices you make.
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