How pension withdrawals are taxed in 2026/27

Separate the tax-free and taxable parts

You can usually take up to 25% of qualifying pension benefits as tax-free cash, subject to your available allowances. The standard lump sum allowance is £268,275 across your pensions, although protections and previous benefits can change what remains available. Tax-free pension cash does not use up your Personal Allowance.

How you access the pension matters. With separate lump sums from an untouched defined contribution pot, each qualifying payment usually has a tax-free and taxable part. If you have already taken the tax-free cash associated with money moved into drawdown, subsequent withdrawals from that drawdown money are generally taxable.

Look at the whole tax year

The UK tax year runs from 6 April to 5 April. Pension income, wages and other taxable income share your allowances; a second pension does not create a second Personal Allowance. State Pension also counts as taxable income even though it is normally paid without tax being deducted.

For 2026/27 the standard Personal Allowance is £12,570. For pension and employment income in England, Wales and Northern Ireland, the usual bands are:

• 20% basic rate: the first £37,700 of taxable income after allowances. With the full £12,570 Personal Allowance, that reaches £50,270 of total income.
• 40% higher rate: income above the basic-rate band, up to £125,140 of total income.
• 45% additional rate: income above £125,140.

These total-income figures exclude tax-free pension cash and assume no other adjustments to the bands. The Personal Allowance reduces where adjusted net income exceeds £100,000 and is zero at £125,140. Scottish pension income has different bands and rates. A large withdrawal can therefore affect more than one tax band.

The £12,570 Personal Allowance, £37,700 basic-rate limit and resulting £50,270 higher-rate threshold are fixed through 5 April 2031.

A simple worked example

Illustrative, not advice. Assume a person in England has £18,000 of other taxable income, the full Personal Allowance and no other adjustments. They take a qualifying £8,000 pension lump sum with 25% tax-free cash available.

• Tax-free part: £8,000 × 25% = £2,000.
• Taxable part: £8,000 − £2,000 = £6,000.
• Because all £6,000 stays in the basic-rate band in this example, the additional Income Tax is £1,200.
• The withdrawal adds £6,800 after final tax.

If the same £8,000 came entirely from drawdown money whose tax-free cash had already been taken, the tax result would differ. These figures exclude fees and any effect on benefits.

Why the first payment can look wrong

A pension provider may initially use an emergency tax code. That can collect more tax than is ultimately due on an occasional withdrawal. Keep the payment statement and use HMRC's pension tax refund service to find the appropriate claim route; the correct form depends on what you withdrew and whether you emptied the pension.

Before requesting money, record the gross withdrawal, expected tax-free element, other income and the net amount you need. Ask your provider how it will process the payment and check your tax code with HMRC if the income estimate is wrong.