How does pension drawdown tax work?

Once you reach the age of 55 you can start to take money from your pension. Up to 25% of your savings can be taken tax free, with the remaining 75% subject to income tax. The amount you pay depends on your total income for the year and your tax rate.

Once you reach the age of 55 you can start to take money from your pension. Up to 25% of your savings can be taken tax free, with the remaining 75% subject to income tax. The amount you pay depends on your total income for the year and your tax rate.

The pension drawdown tax rules

If taking up to 25% of your pension, the process is relatively straightforward. You won’t pay tax on any of that 25% regardless of whether you are:

  • Taking cash in chunks
  • Taking your entire pot
  • Getting a guaranteed income (a pension annuity)
  • Opting for an adjustable income

You’ll only have to pay tax if you opt to take an amount over this 25% threshold. In this case any income you take will be added to the rest of your taxable income for that year, meaning taking large withdrawals could push you into a higher tax bracket.

With this in mind, if you’re taking more than 25% of your pension it’s worthwhile checking the current income tax rates and personal allowances on the gov.uk website. You may pay less tax if you spread out your cash withdrawals and keep below higher rate bands.

How do I pay this tax?

Your pension provider is required to deduct any tax before a withdrawal is paid under Pay As You Earn, and when you take a taxable payment for the first time it’s likely that you’ll be taxed using either an emergency tax code or the tax code provided on your valid P45. See the table below for how this emergency tax could impact on your withdrawal:

Single withdrawal of Tax deducted Payment to you
£1,000 £8 £992
£5,000 £1,058 £3,942
£10,000 £3,058 £6,942

If you are a PensionBee customer then you will be placed on an emergency tax code, and you should settle any remaining underpaid or overpaid tax directly with HMRC. After this payment HMRC should send an updated tax code to your provider, and this code should be used for any future payments.

Drawdown with PensionBee

It’s easy to make a pension withdrawal with PensionBee. You just need to visit the withdrawals tab in your BeeHive, and tell us if you would like to take your full 25% tax free amount or something bigger. We’ll deal with all the complicated bits and put your savings into your bank account, plus If you exceed your 25% tax free allowance we tell you how much tax you need to pay. Find out more about PensionBee.

This information should not be regarded as advice. Income drawdown can be complicated, so please seek professional advice if you need help when you reach retirement.

Last edited: 30-04-2018

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