Under flexi-access drawdown, the tax rules are straightforward in principle: you can take up to 25% of the pot you move into drawdown free of income tax, and every taxable pound after that is added to your other income for the year and taxed at your marginal rate through PAYE. The complication is timing. A large single withdrawal can push you into a higher band, and your very first payment is almost certainly going to be overtaxed under an emergency code. Both problems are avoidable, and overpaid tax is reclaimable within weeks rather than at the end of the tax year.
Drawdown has been open to anyone aged 55 or over with a defined contribution pension since the April 2015 pension freedoms. The minimum access age rises to 57 from April 2028.1GOV.UK. Increasing Normal Minimum Pension Age
The 25% Tax-Free Portion
When you move savings into drawdown, up to 25% of the amount being crystallised comes out free of income tax. This is the pension commencement lump sum, and the Finance Act 2004 (as amended) confirms no income tax liability arises on it.2legislation.gov.uk. Finance Act 2024 – Schedule 9, Part 2 You can take the full 25% in one go when you first enter drawdown, or crystallise your pot in stages over several years and take 25% tax-free from each tranche.
There is a lifetime ceiling on the tax-free total. The lump sum allowance, which replaced the abolished lifetime allowance from 6 April 2024, caps your combined tax-free lump sums at £268,275 across all your pensions.3GOV.UK. Tax on Your Private Pension – Lump Sum Allowance Below roughly £1,073,100 of combined pension savings, the 25% rule is the only limit that bites. Above that, the allowance becomes the binding constraint.
How the Taxable 75% Is Taxed
Once you have set the tax-free portion aside, everything else you draw is treated as pension income and taxed through PAYE.4GOV.UK. Pension Changes 2015 Your provider deducts the tax before the money reaches your account. One useful difference from a salary: pension income is not subject to National Insurance, saving you up to 8% compared with earned income.
Drawdown income stacks on top of everything else you receive in the tax year: employment, state pension, rental income, savings interest. For England, Wales and Northern Ireland, the 2025/26 and 2026/27 bands are:
- Personal allowance up to £12,570 at 0%
- Basic rate £12,571 to £50,270 at 20%
- Higher rate £50,271 to £125,140 at 40%
- Additional rate above £125,140 at 45%
These thresholds are frozen until April 2028.5GOV.UK. Income Tax Rates and Personal Allowances
A single large withdrawal can quietly push you across a band. Suppose you already receive £40,000 from work and state pension combined. A £20,000 drawdown payment brings your total to £60,000, so £9,730 of that withdrawal falls into the 40% band rather than being taxed at 20%. Splitting the same £20,000 across two tax years can roughly halve the tax on it.
The 60% Trap Between £100,000 and £125,140
Anyone with total income above £100,000 loses £1 of personal allowance for every £2 above the threshold. By £125,140 the full £12,570 allowance has gone. That produces an effective rate of 60% on income in that band: 40% on the pound itself, plus 40% on the pound of allowance you have just lost. Sizing individual withdrawals carefully matters most in this range.
Scottish Rates
If you live in Scotland, Scottish rates apply to your pension income. Scotland uses six bands from a 19% starter rate up to a 48% top rate on income above £125,140.6GOV.UK. Income Tax in Scotland – Current Rates The higher rate begins at £43,663, well below the £50,271 threshold used in the rest of the UK. Your tax code carries an S prefix reflecting Scottish residency, so your provider should apply the correct rates automatically.
Why Your First Payment Will Be Overtaxed
This is where most people’s drawdown experience goes sideways. The first time your provider pays you, they usually know nothing about your other income. Without a proper tax code from HMRC, they apply an emergency code on a Month 1 basis, which treats your single payment as if you will receive the identical amount every month for the rest of the year.
For 2026/27, the emergency code is 1257L M1. The provider slices your payment as follows:
- First £1,048 tax-free (one-twelfth of the £12,570 personal allowance)
- Next £3,142 at 20% (one-twelfth of the basic-rate band)
- Next £7,287 at 40% (one-twelfth of the higher-rate band)
- Anything above £11,477 at 45%
A one-off taxable withdrawal of £30,000 is therefore taxed as though you earn £360,000 a year. If your actual total income for the year is £25,000, you will have paid far more tax than you owe. After the first payment, HMRC usually issues an updated code to your provider so later withdrawals are taxed more accurately, but the overpayment on that first payment can be large enough to justify reclaiming straight away.
Reclaiming Overpaid Tax
You do not have to wait until the end of the tax year. HMRC has three forms, and the right one depends on what you did:7GOV.UK. Claim Back Tax on a Flexibly Accessed Pension Overpayment (P55)
- Form P55 if you took a partial withdrawal, left money in the pot, do not expect further payments this tax year, and your provider cannot refund you directly.
- Form P53Z if you withdrew your entire pension in one go.
- Form P50Z if you withdrew your entire pension and have also stopped working with no other income.
Each form asks for your National Insurance number, the PAYE reference of your pension provider, and estimates of your remaining income for the tax year from all sources including any employment, state pension, savings interest and rental income.8HM Revenue and Customs. Flexibly Accessed Pension Payment – Repayment Claim (P55) Those estimates let HMRC calculate your actual liability for the year rather than relying on the emergency assumption.
Get the income figures right. Understate other income and HMRC may issue too large a refund that you later have to pay back; overstate it and you will receive less than you are owed until the year-end reconciliation catches up. Gather payslips, state pension letters and any other income records before you start.
All three forms are on GOV.UK and can be filed online or printed and posted. Online is faster and gives you a confirmation of receipt. Refunds arrive by direct bank transfer if you supply account details, otherwise by cheque. If you do nothing, HMRC will reconcile your position after the tax year ends, usually through a P800 calculation, and refund any overpayment automatically. That can mean months of waiting for money that is already yours.
The Trap to Watch Before You Withdraw
Taking any taxable income from drawdown triggers a permanent cut to how much you can contribute to a money purchase pension in future. Your annual allowance drops from £60,000 to £10,000 for the rest of your life.9GOV.UK. Pensions Tax Manual – PTM056530 This is the money purchase annual allowance, and it catches people who plan to carry on working and contributing after they start drawing.
Taking only the 25% tax-free lump sum does not trigger the reduction. You can crystallise your pot, take the full pension commencement lump sum, and leave the remaining 75% invested in drawdown untouched with the £60,000 allowance intact. The trigger fires the moment you take taxable income from the drawdown fund.
Once fired, it cannot be reversed. If you are still working with generous employer contributions, a small taxable withdrawal for convenience can easily cost you the ability to fund your pension properly in later working years, and any contributions above £10,000 will face an annual allowance charge. That decision is worth making deliberately rather than by accident on a first drawdown request.