Pension drawdown calculator
Drawdown lets you take money from your pension as you need it. A quarter is tax-free and the rest is taxed as income. This shows what you actually keep, and warns about the emergency tax on the first payment.
How drawdown tax works
Drawdown keeps your pension invested and lets you take money out when you want it. The first quarter of what you take is free of tax. The remaining three quarters count as income for the year and are taxed at your marginal rate, on top of any salary, State Pension or other income you already have. There is no National Insurance on pension income, which is one reason drawdown after State Pension age can be efficient.
Worked example
Take £20,000 from a £200,000 pot with no other income this year. £5,000 of it is tax-free. The other £15,000 is taxable, but it sits inside your Personal Allowance and basic-rate band, so the tax is only £486. You keep £19,514. The catch is the first payment: on an emergency code your provider might tax it as though you were withdrawing £20,000 every month, leaving you about £14,400 at first. You claim the £5,114 back from HMRC.
Watch the higher-rate trap
The taxable 75% is added to your other income, so a large single withdrawal can push part of it into the 40% band even if your normal income is modest. Spreading withdrawals over several tax years, and keeping each year's taxable slice within the basic-rate band where you can, is the simplest way to hold your tax down.
Common questions
How is pension drawdown taxed?
Each withdrawal is normally 25% tax-free and 75% taxable. The taxable 75% is added to your other income for the year and taxed at your marginal rate, so a large withdrawal can push part of it into a higher band. There is no National Insurance on pension income.
Why is my first drawdown payment taxed so much?
The first taxable payment usually comes out on an emergency Month 1 tax code, because your provider has no tax code from HMRC yet. That code treats the one-off payment as if you took it every month, so it over-taxes it. On this example the emergency tax is about £5,600 instead of £486, an over-charge of roughly £5,114.
How do I get the emergency tax back?
You can reclaim it. If you have emptied the pot use form P50Z, if you took a lump sum and stopped use P53Z, and for a partial withdrawal use P55. HMRC usually refunds within a few weeks, or it corrects itself through your tax code by the end of the tax year.
Is it better to take smaller withdrawals?
Often yes. Spreading withdrawals across tax years keeps more of each one inside your Personal Allowance and the basic-rate band, so less is taxed at 40%. Taking a very large sum in one year is the main way people fall into higher-rate tax by accident.