From age 55, rising to 57 in April 2028, you can normally take 25% of a defined contribution pension pot tax free, up to a lifetime lump sum allowance of £268,275. A £100,000 pot gives £25,000 tax free, a £400,000 pot £100,000, and only pots above £1,073,100 hit the cap. Everything taken beyond the tax-free share is added to your income for the year and taxed at your marginal rate, and the first taxable withdrawal is usually over-taxed under an emergency code and has to be reclaimed. How and when the rest is drawn decides the tax bill far more than the 25% itself.
What the tax-free share is worth
| Pension pot | 25% tax free | Taxable balance left in the pot |
|---|---|---|
| £100,000 | £25,000 | £75,000 |
| £200,000 | £50,000 | £150,000 |
| £300,000 | £75,000 | £225,000 |
| £400,000 | £100,000 | £300,000 |
| £1,200,000 | £268,275, capped; £31,725 of the quarter is taxable | £900,000 |
The allowance is a lifetime total across all pensions, so tax-free cash taken earlier reduces what is left: someone with £1.2 million who has already taken £100,000 tax free from another scheme can take only £168,275 more, and the remaining £131,725 of their quarter is taxed as income, costing about £45,500 for a person with no other income that year. The pension lump sum calculator applies the cap and any allowance already used, and shows the tax on the excess.
Two ways to take it
The tax-free cash can be taken all at once, with the rest of the pot moved into drawdown or used to buy an annuity, or it can be taken in slices. Under an uncrystallised funds pension lump sum each withdrawal is 25% tax free and 75% taxable, so the tax-free element is spread across the years of retirement rather than banked at the start. Taking the whole 25% up front suits people who need a lump sum to clear a mortgage or fund a purchase; taking it gradually suits people who want to keep the tax-free element growing inside the pension and use it to reduce the taxable part of each year’s income. Defined benefit schemes offer a lump sum by exchanging part of the pension, at a commutation rate set by the scheme, and the same £268,275 allowance applies.
How the rest is taxed
| Withdrawal | Other income in the year | Tax free | Taxable | Tax due | Net |
|---|---|---|---|---|---|
| £20,000 from a £200,000 pot | £12,000 | £5,000 | £15,000 | £2,886 | £17,114 |
| £50,000 from a £200,000 pot | £12,000 | £12,500 | £37,500 | £7,386 | £42,614 |
| £100,000 from a £400,000 pot | none | £25,000 | £75,000 | £17,432 | £82,568 |
Taxable withdrawals stack on top of the State Pension, earnings and other income. A £50,000 withdrawal in a year with £12,000 of other income stays inside the basic rate band and costs £7,386; the same money taken in a year of full-time earnings would be taxed at 40%. Spreading withdrawals across tax years to use each year’s personal allowance and basic rate band is the main planning lever, and taking taxable income also triggers the money purchase annual allowance of £10,000 on future contributions, as our annual allowance guide explains. The pension drawdown calculator works the tax on any withdrawal alongside your other income.
The emergency tax trap
The first taxable payment from a pension is taxed by the provider on a month 1 emergency basis, as though the same amount will be paid every month, so one twelfth of the allowances is set against it and the rest is taxed at rates that assume an annual income twelve times the size. On the £20,000 withdrawal above, tax deducted is about £5,600 against a true liability of £2,886, an over-deduction of £2,714; on the £100,000 withdrawal it is £32,600 against £17,432. The excess is reclaimed within about 30 days using form P55 where the pot continues, P50Z where it is emptied and you have stopped working, or P53Z where it is emptied and you have other income, or it comes back automatically after the tax year through a P800. Taking a small first withdrawal of a few hundred pounds to trigger a proper tax code before the main payment avoids the problem.
Before taking the money
The tax-free cash is not a reason in itself to take it: money left in the pension grows free of tax and passes outside the estate for inheritance tax until April 2027, after which unused pensions are due to come within it. A lump sum taken and left in a bank account can breach the Personal Savings Allowance, count as capital for means-tested benefits and lose the tax shelter for good. Anyone aged 50 or over with a defined contribution pension is entitled to a free Pension Wise guidance appointment before accessing it, and the annuity calculator and retirement income target calculator show what the remaining pot can provide.
Common questions
How much of my pension can I take tax free? Normally 25% of each defined contribution pot, up to a lifetime total of £268,275 across all pensions. Above that the excess is taxed as income.
At what age can I take my pension lump sum? 55 now, rising to 57 from 6 April 2028 for most people. Some older schemes carry a protected earlier age.
Do I have to take the whole 25% at once? No. It can be taken in one go or as the tax-free quarter of each withdrawal over many years, which keeps more of the pot growing tax free.
How is the rest of the pension taxed? As income in the year it is withdrawn, at 20%, 40% or 45% after the personal allowance, on top of the State Pension and any other income.
Why was so much tax taken from my first withdrawal? Because providers use an emergency month 1 code on a first payment, which assumes it repeats every month. Reclaim the excess on form P55, P50Z or P53Z, or wait for HMRC to refund it after the tax year.
Does taking a lump sum affect how much I can pay in? Taking only the tax-free cash does not. Taking any taxable income from the pot triggers the £10,000 money purchase annual allowance on future defined contribution saving.
Information, not financial advice. The lump sum allowance and tax treatment are the published 2026/27 rules on gov.uk: tax when you get a pension; worked figures are from the site’s calculators for a person with a standard personal allowance. Pension decisions are irreversible in many cases, so take regulated advice or Pension Wise guidance before acting on them.