Answers · UK 2025/26
How does pension drawdown tax work?
In drawdown, the first 25% of each pot you crystallise is tax-free; the remaining 75% is taxed as ordinary income at 0%, 20%, 40% or 45% when withdrawn. PAYE is applied per payment, often using an emergency Month-1 code that over-deducts on first drawdown — reclaim via P55/P53Z.
Full answer
Flexi-access drawdown lets you keep your pension invested and draw variable amounts. You choose how much to "crystallise" — usually you take 25% tax-free upfront and leave the 75% taxable portion invested, drawing it down as income. Worked example: £200,000 pot, you crystallise the whole thing — £50,000 tax-free lump sum, £150,000 moves into a drawdown account. Withdraw £20,000 in the first year: you are taxed on the £20,000 along with any other income. With no other income, that uses £12,570 Personal Allowance (0%) plus £7,430 at 20% = £1,486 tax. The same £20,000 alongside a £30,000 salary would be taxed entirely at 20% = £4,000. Higher-rate earners pay 40%, additional-rate 45%. UFPLS works differently — each lump sum is 25% tax-free and 75% taxable, no separate cash-out. Crystallising and taking taxable income triggers the Money Purchase Annual Allowance (MPAA), restricting future contributions to £10,000 a year and removing carry-forward. Emergency tax codes on first withdrawal can over-deduct thousands — file P55 (still in pot), P53Z (whole pot taken) or P50Z (no other income) for a fast HMRC refund.
Try the calculator
More answers
This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.