The 25% tax-free rule, how the rest is taxed, and what often catches people out.
Taking money from your pension sounds simple. It's not.
The 25% tax-free allowance is the part everyone knows. The rest is where the surprises happen.
The basic structure
When you draw from an uncrystallised pension — a SIPP or workplace defined contribution pension you haven't yet started taking from — each withdrawal is treated as 25% tax-free and 75% taxable. This applies to every withdrawal, not just the first one.
So if you take £20,000 from your SIPP, £5,000 arrives tax-free and £15,000 is added to your taxable income for the year.
That £15,000 is taxed at your marginal rate — whatever rate applies to the top slice of your income in that tax year. If you have no other income, it sits inside your personal allowance and attracts no tax. If you already have employment income or rental income or State Pension, the drawdown is layered on top and taxed accordingly.
Crystallised pensions
If you've already taken your 25% tax-free cash as a lump sum, the remaining pension is fully crystallised. Every pound you draw from it is taxable — there's no further tax-free element. This is important to get right when planning how much to take and when.
The emergency tax problem
Here's what often catches people out.
When you take your first SIPP withdrawal, many providers apply an emergency tax code — effectively taxing the payment as if it were your only income multiplied by 12. On a £30,000 withdrawal, that can mean HMRC taking £10,000 or more at source, when the real liability might be a fraction of that.
You can reclaim the overpaid tax through HMRC (forms P55, P53Z or P50Z depending on your situation) but it takes weeks, sometimes months. The money works correctly in the long run — the annual settlement corrects it — but the cash timing is painful if you're relying on that money immediately.
State Pension and the annual true-up
The State Pension is taxable income, but it's paid without any tax deducted at source — there's no PAYE on it. So if your State Pension plus other income pushes you into or further through a tax band, the extra liability is settled through Self Assessment in January following the tax year.
This is worth planning for. In the year your State Pension starts, your overall tax position may be higher than you expect, and the January bill can be a surprise if you haven't modelled it.
The allowances that help
Before you reach the taxable part of drawdown, several allowances work in your favour:
The personal allowance (£12,570) — income below this attracts no tax
The personal savings allowance — £1,000 for basic rate taxpayers, £500 for higher rate — for savings interest
The dividend allowance for investment income
Combined, a retiree with no other income can take a meaningful level of SIPP drawdown with minimal tax. The planning question is how to structure the timing and amounts to use these efficiently.
How giltedge models it
giltedge projects pension drawdown through a UK tax engine that applies the 25/75 split correctly, crystallises pensions when appropriate, and runs an annual true-up in January of each year to settle any difference between tax withheld at source and the actual liability.
The Tax Summaries page breaks down each tax year — income by type, allowances used, tax paid, the true-up amount. It's not a tax return, but it's close enough to see exactly what's happening and when.
