The pension tax-free lump sum: 25%, and what it costs you

You can usually take 25% of a pension tax free, up to £268,275. The rest is taxed as income in the year you take it. Two things cost people real money here and neither is the rate: a first withdrawal is usually taxed on an emergency code that assumes you will take the same amount every month for a year, and taking taxable money through drawdown permanently cuts what you can pay back in from £60,000 a year to £10,000.

How much you can take

A quarter of the pot, tax free, and the other three quarters taxed as income when you draw them. Here is what that looks like across a range of pot sizes, with the tax on the remainder shown for someone with no other income and for someone still on a £30,000 salary.

Taking the whole pot in one tax year, 2026/27, rest of UK. Almost nobody should do that with a large pot, and the table shows why. To model contributions and growth instead, use the pension calculator.

The shape of that table is the argument for spreading withdrawals across tax years. Emptying a £200,000 pot in one go costs £53,703 in tax even with no other income, because the taxable three quarters runs through the basic rate band, the higher rate band and out the other side. There is also a trap at the top that nobody mentions: above £100,000 of total income your personal allowance is withdrawn by £1 for every £2, so a large withdrawal can be taxed at an effective 60% on that slice.

The cap is worth understanding rather than memorising. The lump sum allowance of £268,275 is exactly 25% of £1,073,100, so below that pot size you simply get your quarter and the cap never comes into it.

The two ways of taking it

There are two routes and the 25% is the same in both. What differs is when the tax lands, and one other thing that matters more.

One lump sum up front. You take the whole 25% as a single tax-free payment and leave the rest invested. Nothing is taxed until you later draw income from what remains.

Slice by slice. Every withdrawal is 25% tax free and 75% taxable. There is no limit on how many you take, so you can spread the taxable part across several tax years and use several years of personal allowance and basic rate band instead of one.

On tax alone the second route usually wins for anyone with a decent pot, for exactly the reason the table above shows. But it carries a consequence the first route does not, and that consequence is the next section but one.

The emergency tax trap

This is the part that surprises people, and it is not your provider getting it wrong. A first flexible withdrawal is usually taxed on an emergency code on a month 1 basis, which means the allowances and the tax bands are divided by twelve and applied as though you were going to take that same amount every month for the rest of the year.

So a one-off withdrawal of £30,000 is taxed as though your income for the year were £360,000. Here is the size of the gap.

A first flexible withdrawal by someone with no other income that year, 2026/27. The taxable part is the 75% left after the tax-free cash. Someone with other income owes more in the "actually due" column, so their overpayment is smaller.

You get it back. The question is when, and whether you noticed. It is also the reason a small first withdrawal is often sensible: take a token amount first, let HMRC issue a proper tax code against it, then take the real withdrawal against the right code.

Getting the money back

HMRC publishes how much it repays every quarter, in its pension schemes newsletters. Adding the four quarters to June 2026 together gives a picture of the scale that the quarterly figures on their own do not.

Forms processed and tax repaid, from HMRC pension schemes newsletters 174, 177, 180 and 183. The annual totals are our own sum of the four published quarters. The average claim is £3,511.

These figures understate the problem rather than overstating it, and it is worth being clear why: they count only people who claimed during the tax year. Anyone who waits for HMRC's automatic year-end review is not in them at all.

There are three forms and picking the right one is the whole job:

• P55 if you took part of your pot and are not emptying it
• P53Z if you took the whole pot and are still working
• P50Z if you took the whole pot and have stopped working

Do nothing and HMRC reviews your position after the tax year ends and sends a calculation. You are not going to lose the money. You will be without it for up to a year, which matters if you took it for a reason.

The £50,000 side effect

This is the most consequential thing on the page and gov.uk's consumer guidance does not even name it.

Normally you can put up to £60,000 a year into pensions with tax relief. Once you take taxable money out of a pot flexibly, that drops to £10,000, for that tax year and every year afterwards. It is called the Money Purchase Annual Allowance and it does not reverse.

The distinction that matters is what counts as triggering it.

Taking your tax-free lump sum on its own does not trigger it. HMRC lists a pension commencement lump sum among the events that do not apply the MPAA, alongside trivial commutation, a small lump sum and an annuity that cannot decrease.

Taking taxable money does. A first income withdrawal from drawdown triggers it, and so does any slice-by-slice withdrawal, because each of those carries a taxable 75%.

So if you are 55, still working and still paying into a pension, the slice-by-slice route that looked better on tax costs you £50,000 of contribution headroom every year from then on. For someone with a decade of contributions left, that is the expensive part of the decision and the tax on the withdrawal is a footnote to it.

If you have a final salary pension

A defined benefit scheme works differently and the 25% framing does not really apply. There is no pot to take a quarter of. Instead you give up some of your annual pension in exchange for cash, which is called commutation, and how much cash each pound of pension buys is set by your scheme's commutation factor.

HMRC's own examples show the shape: a £30,000 a year pension on a 15 to 1 factor gives a maximum tax-free lump sum of about £138,461. A £50,000 pension on the same factor, taking £200,000 of cash, leaves a residual pension of about £36,667 a year.

That last figure is the point. The cash is not free money from a fund, it is income you will not receive for the rest of your life, and the exchange rate is set by your scheme rather than by the market. Factors vary a lot between schemes, so there is no typical number worth quoting: yours is in your scheme booklet or your retirement pack, and it is the single figure that decides whether commuting is a good deal for you.

Separately, if you have £30,000 or less across all your private pensions, you can usually take the lot as a trivial commutation lump sum, of which 25% is tax free.

When you can take it

Usually 55 at the earliest, though your scheme's own rules can set a later age. That is rising: from 6 April 2028 the normal minimum pension age becomes 57. Members of the firefighters, police and armed forces public service schemes are not affected.

If you are currently 54 or 55 this is worth a moment's thought, because the change lands part way through what is otherwise a free choice about timing.

Once you have taken your tax-free cash, gov.uk says you have six months to start taking the remaining 75%.

Is it being scrapped?

Nothing has been announced. This gets asked a lot, and the honest answer is that the 25% rule and the £268,275 allowance are the law as it stands, with no official statement that either is going.

The change that has been announced is the rise in the minimum pension age to 57 in April 2028. It is worth being careful about the difference, because acting early on a rumour is itself irreversible: taking money out of a pension because you are worried a rule might change can trigger the annual allowance cut above and cost you more than the rumour ever would have.

To model what your pot might be worth and what contributions do to it, the pension calculator runs the projection, and how pensions work covers tax relief on the way in. If you are weighing salary against pension contributions, salary sacrifice explained covers the other side of it.

Common questions

How much of my pension can I take tax free?

Usually 25%, capped at £268,275. On a £100,000 pot that is £25,000, and on a £400,000 pot it is £100,000. The cap only starts to bite on pots above £1,073,100, where 25% would be more than the allowance.

How much tax will I pay on a £60,000 pension lump sum?

If you take the whole £60,000 pot at once, £15,000 is tax free and £45,000 is taxable. With no other income the tax on that is about £6,486. On a £30,000 salary it is about £13,946, because the withdrawal stacks on top of what you already earn. Your provider will very likely take much more than that at first under an emergency code.

How many times can I take 25% tax free from my pension?

There is no limit on the number of withdrawals, but there is a limit on the total. If you take money slice by slice, each slice is 25% tax free and 75% taxable. If you take one big lump sum up front instead, that is the whole of your tax-free entitlement for that part of the pot. Either way the tax-free total across everything is 25% of what you crystallise, capped by the lump sum allowance.

Why was so much tax taken from my first pension withdrawal?

Because a first flexible withdrawal is usually taxed on an emergency code on a month 1 basis. That treats the payment as though you were going to receive the same amount every month for a year, so a one-off £30,000 withdrawal is taxed as if your income were £360,000. It is not a mistake by your provider, it is how the system works, and you claim the difference back.

How do I claim back overpaid pension tax?

With one of three HMRC forms, depending on your situation. Use P55 if you took part of your pot and are not emptying it. Use P53Z if you took the whole pot and are still working. Use P50Z if you took the whole pot and have stopped working. If you do nothing, HMRC reviews your position after the tax year ends and sends a calculation, so you get it back either way, just later.

Does taking my tax-free cash affect how much I can pay in?

Not on its own, and this is the distinction that matters most. Taking only the tax-free lump sum leaves your annual allowance at £60,000. Taking any taxable money, through drawdown income or a slice-by-slice withdrawal, triggers the Money Purchase Annual Allowance and cuts what you can contribute to £10,000 a year, permanently.

Is the pension tax-free lump sum being scrapped?

Nothing has been announced. The 25% rule and the £268,275 allowance are the current law and no official source says either is going. The change that has been announced is different: the earliest age you can normally take a pension rises from 55 to 57 on 6 April 2028.

Is this article financial advice?

No, and pensions are the place where that matters most. It sets out the published 2026/27 rules and figures and shows what they come to, with the sums worked by our own tested engine. Taking money out of a pension is usually irreversible and the right answer depends on your whole position. Speak to a regulated adviser, or use the government-backed Pension Wise service, before you act.

About this article

Written by the calcd team. We build UK money calculators and explain the numbers behind them in plain English. The 25% rule and the allowances come from gov.uk and HMRC's published pension rates, what does and does not trigger the Money Purchase Annual Allowance from HMRC's Pensions Tax Manual, and the reclaim figures from HMRC's pension schemes newsletters, whose four published quarters we have added together ourselves. Every tax figure is worked at page load by our own tested engine. Figures are estimates for the 2026/27 tax year and are not financial or pension advice. Last updated September 2026.