When you take money from a drawdown pension, your provider deducts income tax through the Pay As You Earn (PAYE) system before the payment reaches your bank account. Up to 25% of your pension pot can normally be taken tax-free, capped at a lifetime total of £268,275 across all your pensions, and everything above that is added to your other income for the year and taxed at your marginal rate.1GOV.UK. Tax When You Get a Pension So the question of how you pay tax on pension drawdown has a short answer and a longer one: the provider does the paying on your behalf, but the amount deducted depends on your tax code, the shape of your withdrawal, and whether HMRC has caught up with your circumstances yet.
The 25% Tax-Free Portion
You can access your tax-free entitlement in one of two ways, and the choice affects how the remaining pot is treated.
Take it all upfront and your provider sets aside 25% of the designated funds tax-free, moving the other 75% into a flexi-access drawdown fund where every future withdrawal is fully taxable as income.2GOV.UK. Tax on Your Private Pension Contributions – Lump Sum Allowance
Take it gradually through Uncrystallised Funds Pension Lump Sums (UFPLS) and each withdrawal is split: 25% tax-free, 75% taxed as income.3HM Revenue & Customs. Explanatory Note (Accessible Version) – Chapter 15A This continues until you have used the full entitlement.
Either route, the total tax-free cash across all your pensions is capped at £268,275, known as the lump sum allowance. If you hold several schemes, you must track combined usage. Anything above the cap is taxed as income.2GOV.UK. Tax on Your Private Pension Contributions – Lump Sum Allowance
How the Taxable Portion Is Taxed
Once you’re past the tax-free element, drawdown income sits alongside your other taxable income for the year: state pension, wages, rental income, everything. The total decides which band applies. For 2025–26 in England, Wales, and Northern Ireland:4GOV.UK. Income Tax Rates and Personal Allowances
- Personal allowance (0%): first £12,570.
- Basic rate (20%): £12,571 to £50,270.
- Higher rate (40%): £50,271 to £125,140.
- Additional rate (45%): above £125,140.
The personal allowance shrinks once your total income passes £100,000. For every £2 above that threshold you lose £1 of allowance, and by £125,140 it’s gone. Income sitting in that band effectively taxes at 60%, because you pay 40% on the pound and simultaneously lose tax-free ground. A single large drawdown can push you into this zone unexpectedly, and splitting a withdrawal across two tax years is one of the cleanest ways to keep more of it.5GOV.UK. Income Tax Rates and Allowances for Current and Previous Tax Years
If you live in Scotland, different rates apply. Scotland uses six bands rather than three, running from 19% at the starter level to 48% at the top, and the higher rate of 42% starts at a lower income level than the 40% band elsewhere in the UK.6mygov.scot. Current Rates – 6 April 2026 to 5 April 2027 Your tax code carries an “S” prefix and your provider applies the Scottish rates automatically.
Why Timing Matters
The band structure means the same withdrawal can cost very different amounts depending on when you take it. Say your state pension and part-time earnings already bring you to £40,000. A £15,000 drawdown lifts you to £55,000 and drags part of the payment into the 40% band. The same £15,000 split as two withdrawals across two tax years could stay entirely in the 20% band. The saving is real.
How PAYE Collects the Tax
Your provider works out the deduction using your tax code, sends the net amount to your account, and hands the tax to HMRC on its regular reporting cycle.1GOV.UK. Tax When You Get a Pension
The tax code is the whole ball game. It tells the provider how much of your income is tax-free and what rate applies to the rest. If you have recently stopped working, hand your provider the P45 from your former employer. It shows your earnings and tax paid so far this tax year, so the provider can apply the right code from the first payment rather than the wrong one.
Multiple pensions in drawdown each need their own code. HMRC usually allocates the personal allowance to one source and gives the others a basic-rate code, typically “BR”. Without that split, two providers could each apply the full allowance and leave you underpaid at year-end. You can check and adjust your codes through your personal tax account on GOV.UK.
Emergency Tax on Your First Withdrawal
Most people are caught out here. When you take your first drawdown payment, your provider often has no code from HMRC yet. Rather than wait, they apply an emergency code on a “Month 1” basis, treating the withdrawal as if you’ll receive the same amount every month for the rest of the year. Only one-twelfth of the annual personal allowance (roughly £1,048) is applied to that one payment, and the rest is taxed using monthly equivalents of the basic, higher, and additional rate bands.
The result is a much larger deduction than you actually owe. Someone withdrawing £20,000 as a one-off can lose a significant chunk to emergency tax, because HMRC’s system initially reads that as one month of a £240,000 annual income. The code corrects once HMRC issues the right one, which takes a few weeks. For regular monthly payments, deductions usually settle within a couple of months. For one-off withdrawals, you often need to reclaim the overpayment yourself.
Reclaiming Overpaid Tax
You don’t have to wait for the tax year to end. HMRC has specific forms depending on your situation:7GOV.UK. Claim Back Tax on a Flexibly Accessed Pension Overpayment (P55)
- Form P55: partial withdrawal, pot not emptied.
- Form P53Z: pension fully accessed, other taxable income continues.
- Form P50Z: pension fully accessed, no work, no other taxable income.8GOV.UK. Claim a Tax Refund If Youve Stopped Work and Flexibly Accessed All of Your Pension (P50Z)
- Form P53: one-off lump sum from a small pot or trivial commutation.
You’ll need the payment details and the tax that was deducted. Most claims are processed within 30 working days. The forms are available on GOV.UK and can be filed online.
If you do nothing, HMRC will reconcile after 5 April and issue a P800 calculation. Any refund is paid automatically or credited against future tax. That works, but it can take months. Filing a claim form gets the money back far sooner.
The Money Purchase Annual Allowance Trap
Taking taxable drawdown income triggers a permanent cut to how much you can contribute to a money purchase pension with tax relief. Once you take your first taxable payment, your annual allowance drops from £60,000 to £10,000. This is the Money Purchase Annual Allowance (MPAA).9GOV.UK. Pension Schemes Rates
The trigger is the first payment of taxable income from a flexi-access drawdown fund.10GOV.UK. Money Purchase Annual Allowance – Trigger Events Taking only the 25% tax-free lump sum does not trigger it. Designating funds for drawdown without withdrawing taxable income does not trigger it. But once even £1 of taxable drawdown income leaves your pension, the £10,000 cap locks in permanently.
This matters if you’re still working or expect to return. Dip into drawdown at 57, go back to work at 59, and your pension tax relief is capped at £10,000 a year for the rest of your working life. If you’re planning a small withdrawal now but hope to make significant contributions later, weigh the MPAA carefully before pressing the button.
What Happens to a Drawdown Pension on Death
Drawdown has long been favourable for passing wealth on, though the rules are changing. Under current rules, if you die before age 75 your nominated beneficiaries can receive the remaining fund free of income tax. If you die at 75 or older, they still receive the funds, but withdrawals are taxed as their income at their marginal rate.11GOV.UK. Tax on a Private Pension You Inherit One catch: a lump sum paid more than two years after the provider is told of the death is taxed in full regardless of age, so keeping an expression of wishes form current is worth the ten minutes it takes.
From 6 April 2027, unused pension funds will be included in the value of your estate for inheritance tax. Currently drawdown pots sit outside the estate entirely, which is one of the reasons many prefer drawdown to an annuity. That shelter goes away in 2027, and larger pots could face an inheritance tax charge on top of the income tax beneficiaries pay when they draw the money.12GOV.UK. Technical Note – Inheritance Tax on Pensions For anyone with a substantial fund, withdrawal timing and estate planning become considerably more consequential from that date.