Tax on pension withdrawals, and how to avoid overpaying

How a pension withdrawal is taxed

When you take money from a defined contribution pension, two things decide the tax:

1. The tax-free part. Usually 25% of what you take is tax-free, up to the £268,275 lump sum allowance across all your pensions.
2. The taxable part. The rest is added to your other income for that tax year, including the State Pension, wages and any other pensions, and taxed at your normal income tax rates.

So the same withdrawal can cost very different amounts of tax depending on what else you earn that year. Taking a big sum in one year can push you into the 40% or 45% band, and above £100,000 you also start to lose your Personal Allowance.

Worked examples (England, Wales and Northern Ireland, 2026/27)

Each withdrawal is taken as a lump sum where 25% is tax-free (an "uncrystallised funds pension lump sum", or UFPLS).

Compare the first two rows. Taking £20,000 costs 15% in tax. Taking £60,000 in the same year costs 18%, because part of it is taxed at 40%. Spreading withdrawals across tax years so that most of the taxable part stays in the basic-rate band usually saves money.

Emergency tax: why your first withdrawal may be overtaxed

When you take taxable money from a pension for the first time, your provider usually doesn't have the right tax code for you. It has to use an emergency code, often on a "month 1" basis. That means it treats the payment as if you will receive the same amount every month, and gives you only one-twelfth of your Personal Allowance and tax bands.

For a one-off payment, that usually takes far too much tax:

You don't lose this money. It is a timing problem, but it can be a big one if you were relying on the cash.

How to get overpaid tax back

HMRC has an online service to claim back tax on a pension withdrawal. Which form you need depends on what you did:

• P55: you took part of your pot and won't take any more from that pension this tax year.
• P53Z: you took the whole pot and you have other income from work or pensions.
• P50Z: you took the whole pot and have no other income apart from the State Pension.

If you don't claim, HMRC may repay it automatically after the end of the tax year, but that can mean waiting many months. If you take regular payments, your tax code is normally corrected for later payments in the same year.

Ways to keep the tax down

1. Spread withdrawals across tax years. The tax year runs from 6 April to 5 April. Taking half in March and half in April uses two years' bands.
2. Use your Personal Allowance in years with low income, for example between stopping work and starting your State Pension.
3. Watch the £100,000 line. Between £100,000 and £125,140 of income you lose your Personal Allowance, so the effective rate is 60%.
4. Remember the money purchase annual allowance. Taking taxable money flexibly cuts what you can pay back into pensions with tax relief to £10,000 a year.

Try your own numbers in the pension withdrawal tax calculator.

Small pots work differently

If a pension is worth £10,000 or less, you may be able to take it all as a "small pot" lump sum. Usually 25% is tax-free and the rest is taxed. Taking a small pot this way doesn't trigger the money purchase annual allowance. You can do this for up to three pensions you set up yourself; MoneyHelper sets no limit for pensions set up by an employer. Ask your provider whether your pension qualifies.

This guide is general information, not personal financial advice. Rules can change and your situation may differ. For free, impartial help, contact MoneyHelper, or speak to a regulated financial adviser.