Answers · UK 2025/26
How is pension drawdown taxed in 2026/27?
When you take money from a drawdown pension, the tax-free cash (up to 25% of your fund, or GBP268,275 lifetime maximum) is taken first. All subsequent income withdrawals are taxed as pension income at your marginal income tax rate -- 20%, 40%, or 45% -- through PAYE. Emergency tax codes are common on first withdrawal.
Full answer
Pension drawdown (also called flexi-access drawdown) lets you take income from your defined contribution pension pot while the remainder stays invested. The tax treatment in 2026/27 works as follows. Tax-free cash (pension commencement lump sum): you can take up to 25% of your pension fund tax-free, subject to a lifetime cap of GBP268,275. This cap applies to all pensions combined, not per pension pot. Tax-free cash does not have to be taken all at once -- it can be phased alongside income withdrawals. Taxable income withdrawals: once you begin taking income from drawdown, all withdrawals are taxed as pension income at your marginal rate of Income Tax. For 2026/27: 20% on income between GBP12,571 and GBP50,270 (combined with all other income); 40% on income between GBP50,271 and GBP125,140; 45% above GBP125,140. The Personal Allowance of GBP12,570 still applies to pension withdrawals combined with all other income. Emergency tax codes: HMRC often applies an emergency tax code (month 1 basis) to the first drawdown payment from a new pension, which can result in significant overtaxing on the first withdrawal. To reclaim, submit form P55 (if you have taken a partial withdrawal), P53Z (if you have emptied the pension and have other income), or P50Z (if you have emptied the pension and have no other income). Alternatively, HMRC will correct the tax code for future payments automatically -- but this can take several months. UFPLS (uncrystallised fund pension lump sum): an alternative to drawdown is to take the whole fund as a lump sum, with 25% tax-free and 75% taxable. Each UFPLS payment is 25% tax-free / 75% taxable proportionally. Small pension pots: pension pots under GBP10,000 can be taken as a trivial commutation lump sum -- 25% tax-free, 75% taxable. Income sequencing in retirement: how much to withdraw each year from a drawdown pension is a key planning question. Withdrawing too much can push you into a higher tax band or reduce Universal Credit entitlement. Withdrawing too little leaves funds unnecessarily exposed to future estate taxation.
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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.