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 State Pension is £11,502.40/year. This consumes £11,502.40 of your £12,570 personal allowance.

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

• You have only £1,067.60 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: £11,502/year
• Pension drawdown: £12,000/year (£3,000 tax-free + £9,000 taxable)
• Total taxable income: £11,502 + £9,000 = £20,502
• Tax: (£20,502 – £12,570) × 20% = £7,932 × 20% = £1,586/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.

Related Guide

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