Pension in Payment Tax 2026/27: Drawdown and Annuity Income

How Pension Income Is Taxed in the UK

Pension income in the UK is taxed as employment income for the purposes of the Income Tax (Earnings and Pensions) Act 2003. It does not matter whether the income comes from a personal drawdown arrangement, a final salary (defined benefit) scheme, an annuity purchased from an insurance company, or the State Pension -- all of it is added together with your other taxable income and taxed using the same rate schedule.

For 2026/27 the income tax bands are:

• Personal Allowance: GBP 12,570 (tapers above GBP 100,000)
• Basic rate 20%: GBP 12,571 to GBP 50,270
• Higher rate 40%: GBP 50,271 to GBP 125,140
• Additional rate 45%: above GBP 125,140

There is no separate or preferential rate for pension income. A retired surgeon drawing GBP 80,000 from a defined benefit scheme pays 40% on the slice between GBP 50,270 and GBP 80,000 -- exactly the same as an employed surgeon earning GBP 80,000 salary.

The one crucial exception is the Pension Commencement Lump Sum (PCLS) -- the 25% tax-free cash. This is discussed in detail below.

The 25% Tax-Free Cash: PCLS Rules in 2026/27

Before the abolition of the lifetime allowance in April 2024, individuals could take 25% of their pension fund tax-free up to a maximum of 25% of the lifetime allowance (GBP 268,275). That maximum figure has been retained as the Lump Sum Allowance (LSA) under the new framework introduced by the Finance (No. 2) Act 2023.

For most people, the PCLS is 25% of the pension pot crystallised at the point of accessing the pension. You can take the PCLS in one go at the point of accessing benefits, or phase it over time through multiple crystallisation events (for example crystallising GBP 100,000 at a time).

Tax-free cash that exceeds GBP 268,275 is taxed as pension income at your marginal rate (income tax only -- pension lump sums do not attract NIC). If you have existing pension protections registered before the relevant dates, different rules may apply and specialist advice is essential.

The PCLS is not counted as income for the purposes of:

• Reducing the personal allowance taper (it is not adjusted net income)
• Triggering the MPAA

Taking tax-free cash alone -- by designating funds to drawdown but not yet drawing income -- does not trigger the Money Purchase Annual Allowance.

State Pension: GBP 12,548 and Its Interaction With the Personal Allowance

The full new State Pension rose by 4.8% in April 2026 under the triple-lock guarantee (the highest of earnings growth, CPI inflation, or 2.5%). The full weekly amount is GBP 241.30, which annualises to GBP 12,548.

This figure is notable for one reason above all others: it is GBP 22 below the personal allowance of GBP 12,570. That means a pensioner with only State Pension income pays zero income tax. But the margin is razor-thin. By the time the next triple-lock increase takes effect in April 2027, State Pension is likely to exceed the personal allowance if the allowance remains frozen (it is currently frozen until April 2028 under current government policy). At that point, DWP will begin collecting income tax on State Pension through a new mechanism -- either via PAYE on other income sources or through a new arrangement.

For now, the DWP pays State Pension gross. HMRC collects any tax through your PAYE tax code. If you also receive an occupational pension or annuity, the pension provider applies a tax code (typically an adjusted BR or K code that factors in the State Pension income) and deducts tax at source.

If you receive State Pension plus drawdown income and your total exceeds GBP 12,570, you must either:

• Rely on your pension provider to apply the correct PAYE code, or
• Register for Self Assessment to declare income and make sure you pay the correct amount

Use the CalcHub Income Tax Calculator to model exactly how much tax you will pay across all pension income sources.

Drawdown Income: PAYE and Self Assessment

Flexi-access drawdown allows you to leave your defined contribution pension invested and draw income as and when you choose. The pension provider (scheme administrator) must operate PAYE on all income payments. If you take an ad hoc withdrawal -- particularly a first withdrawal -- the scheme administrator may not have a current tax code from HMRC and will apply an emergency code on a month-1 basis. This almost always overtaxes you significantly.

For example, if you withdraw GBP 20,000 as a one-off payment and the provider applies an emergency monthly code, they will calculate tax as if you are receiving GBP 240,000 per year, resulting in a massively inflated tax deduction. You can reclaim the overpaid tax by completing form P50Z (if you have stopped work and have no other income), P53Z (if you have taken your whole pot), or P55 (if you have taken a partial withdrawal). HMRC will refund within 30 days.

To avoid emergency coding, complete the relevant HMRC starter checklist for your pension provider before taking a withdrawal, or ensure HMRC issues the correct cumulative tax code by logging into the HMRC personal tax account.

For those with multiple pension pots, drawdown accounts, and other income, Self Assessment is usually the most reliable way to reconcile everything. The online return is due by 31 January following the tax year. Interest accrues at 7.25% per year on late-paid tax, so do not ignore self-assessment obligations.

Annuity Income: Fixed and Taxed for Life

An annuity purchased from an insurance company converts your pension pot into a guaranteed income for life (or a fixed term). The annuity provider operates PAYE in exactly the same way as an employer. You will receive a P60 each year showing total annuity income and tax deducted.

The income level is fixed at outset (unless you buy an inflation-linked annuity) and cannot be adjusted. This means the tax you pay each year is predictable, making annuity holders the least likely group to face unexpected tax bills.

However, annuity income does count toward the personal allowance taper. If your annuity income plus State Pension plus any other income exceeds GBP 100,000, you begin to lose your personal allowance at a rate of GBP 1 for every GBP 2 of excess income. The effective marginal rate in the range GBP 100,001 to GBP 125,140 is 60%, not 40%. This affects relatively few retirees but can arise for those with large final salary pensions or multiple annuities.

Enhanced annuities are available for those with health conditions or lifestyle factors (smoking, obesity) and can pay substantially higher rates -- but the income is taxed in the same way. Shopping around and using the open market option remains important regardless of tax status.

The Money Purchase Annual Allowance: Why Timing First Income Matters

The Money Purchase Annual Allowance (MPAA) is one of the most important and least understood pension rules for people approaching retirement. It is set at GBP 10,000 for 2026/27, against a standard annual allowance of GBP 60,000.

The MPAA is triggered the first time you access flexible income from a defined contribution pension. Trigger events include:

• Taking income from a flexi-access drawdown arrangement
• Receiving an Uncrystallised Funds Pension Lump Sum (UFPLS) where 75% is taxable
• Receiving income from a flexible annuity that can decrease

The MPAA is NOT triggered by:

• Taking tax-free cash only (designating funds to drawdown without drawing income)
• Purchasing a standard lifetime annuity
• Taking income from a capped drawdown arrangement before April 2015 (pre-existing)
• Receiving a small pots lump sum

Once the MPAA is triggered, your total employer and employee contributions to defined contribution schemes in any single tax year must not exceed GBP 10,000. Contributions above GBP 10,000 incur an annual allowance charge at your marginal income tax rate.

This is critical for anyone who semi-retires and continues working with employer pension contributions: if the employer contributes GBP 15,000 per year to your pension and you have triggered the MPAA, GBP 5,000 of those contributions will be subject to a tax charge. You must notify your employer and all pension providers when the MPAA is triggered.

You must also inform HMRC via Self Assessment. Failure to do so can result in penalties.

Pension Credit and Means-Tested Benefits

For those with limited pension income, the means-tested Pension Credit can top up weekly income significantly. In 2026/27 the Guarantee Credit tops single retirees up to a minimum of GBP 238.00 per week and couples to GBP 363.25 per week.

Pension Credit is administered by the DWP and is separate from the income tax system. However, pension income (including State Pension, drawdown, and annuity) is counted as income for Pension Credit purposes. Tax-free cash (PCLS) is not counted as income for Pension Credit.

Pensioners entitled to Pension Credit may also qualify for a free TV licence (for those aged 75 or over), Council Tax Reduction, and Housing Benefit. Claiming Pension Credit is therefore important even if the top-up amount is small.

Use the CalcHub Pension Credit Calculator to check whether you or a family member might be entitled to Pension Credit and by how much it could increase weekly income.

Practical Steps to Manage Pension Tax in 2026/27

Managing pension income tax efficiently requires regular review as your income changes from year to year:

Check your tax code each April. HMRC issues a notice of coding (P2) when it updates your PAYE code. Errors are common when State Pension increases or when you start a new drawdown arrangement. Report errors promptly via the HMRC personal tax account.

Spread withdrawals across tax years. If you have flexibility over when you take drawdown income, taking a smaller amount in two tax years can keep you in the basic-rate band rather than crossing into the higher-rate band in one year.

Use your spouse or civil partner's allowance. If your partner has a lower income, nominating your pension so that it pays income to them (via a joint annuity or by putting a pension in their name during accumulation) can reduce your combined household tax bill.

Consider pension recycling carefully. If you take PCLS and contribute it back into a pension, HMRC has anti-recycling rules that can invalidate the PCLS tax exemption. The rules are complex -- take advice before recycling large lump sums.

File Self Assessment if in doubt. If you have multiple income sources, always file a return. The cost of professional preparation is almost always less than the cost of HMRC penalties and interest on underpaid tax.

The CalcHub State Pension Calculator, Income Tax Calculator, and Take-Home Pay Calculator are all useful tools for modelling different pension income scenarios in 2026/27.