Taking money from a pension pot: tax-free cash, drawdown and the £10,000 limit
Published · 5 min read · Figures checked . UK rules and rates change, so check the official sources below before you act.
In 2026/27 you can usually take up to 25% of a defined contribution pension tax-free, with the rest taxed as income. Taking taxable money can also cut the amount you can pay in later to £10,000 a year.
What it is and how it works
A defined contribution pension is a pot of money built from contributions and investment growth, as opposed to a promised salary-based income. When you reach the age at which you may start using it, you generally have several choices: buy a guaranteed income for life (an annuity), take the pot out in one go or in several lump sums, or leave it invested and take money as you need it, which is known as drawdown. These routes can be combined, and many people use more than one. This guide covers the tax rules that apply when you take cash or income, rather than the annuity route, which has its own guide. The key point is that the way you take money decides how much is tax-free, how it is taxed and whether a lower limit on future pension saving applies.
The tax-free part and the figures that apply
GOV.UK says you can usually take up to 25% of the amount built up in any pension as a tax-free lump sum. The maximum tax-free amount across your pensions is the lump sum allowance, which is £268,275 for each of 2024/25, 2025/26 and 2026/27 for most people, according to the GOV.UK pension scheme rates page (last updated 6 April 2026). A related figure, the lump sum and death benefit allowance, is £1,073,100 for the same years. Some people hold protections that can raise their tax-free limit, so their figure may differ. The tax-free lump sum does not reduce your Personal Allowance, the amount of income you can have each year before Income Tax starts, which GOV.UK gives as usually £12,570.
How the rest is taxed
Anything above the tax-free part is taxed as income. GOV.UK explains that the provider deducts the tax before paying you, and gives the example of a £60,000 pension with £15,000 taken tax-free, leaving £45,000 that is taxable. Most private and workplace pension providers deduct Income Tax using Pay As You Earn (PAYE), the system employers also use. Because the taxable part is added to your other income in the same tax year, a large withdrawal can push some of your income into a higher rate band, and GOV.UK warns that you may owe extra tax at the end of the tax year. The reverse can also happen: tax taken at source can be more than your final bill. GOV.UK has a refund route for people who have stopped working and taken all their pension, or who have flexibly accessed their pension, and the details depend on your situation.
The lower limit on paying in: the money purchase annual allowance
The annual allowance is the most that can be paid into your pensions in a year with tax relief, and it is £60,000 in 2026/27. However, once you flexibly access a money purchase (defined contribution) pension in certain ways, a lower limit called the money purchase annual allowance applies. GOV.UK gives it as £10,000 for 2026/27, and it has been £10,000 each year since 2023/24. HMRC's Pensions Tax Manual lists what triggers it. These include taking the first income from a flexi-access drawdown fund and taking an uncrystallised funds pension lump sum, which is a lump sum paid straight from a pot that has not yet been moved into drawdown, with part tax-free and part taxable. The manual also lists certain lifetime annuities that can reduce. Taking only the tax-free cash is not described as a trigger on the page we read, so it can be worth checking the exact route with your provider before you take money.
A worked example
These figures are illustrative only and not a recommendation. Suppose a pot of £80,000 and no protections. Up to 25% is tax-free, so 0.25 x £80,000 = £20,000 can be taken tax-free, well below the £268,275 lump sum allowance. That leaves £80,000 - £20,000 = £60,000 invested in drawdown. If the person then takes £8,000 of taxable income in a tax year and has no other income, the total of £8,000 is below the usual £12,570 Personal Allowance, so no Income Tax would normally be due on it, although a provider using PAYE may still deduct some tax first. Once that taxable income is taken, the money purchase annual allowance applies. If that person later paid £15,000 into a pension in a year, that would be £15,000 - £10,000 = £5,000 above the £10,000 limit, which is why the limit matters for anyone still working and saving.
Who this applies to and who it does not
This guide is general information for people with defined contribution pensions registered in the UK, using the 2026/27 tax year rules. Income Tax rates and bands can differ in Scotland, so the amount of tax on the taxable part may differ there. It does not cover defined benefit (final salary) pensions, which pay a set income, or the State Pension. Rules for inherited pensions are different, and you may have personal protections that change your tax-free limit. Taking pension income can also affect means-tested benefits, so many people check with the relevant benefit office first.
Common mistakes and free help
Common mistakes include taking a large amount in one tax year without realising the effect on the tax rate, not knowing that a first withdrawal can start the lower £10,000 limit, and responding to unexpected offers to release pension money. Pension scams are common, and it can be worth checking that any firm is authorised by the Financial Conduct Authority. Free, impartial guidance is available from MoneyHelper, including Pension Wise for defined contribution pensions, and it is described as a place to talk through options before any money is taken. Whether to take money, how much and when depends on personal circumstances, so this guide does not say what anyone should do.
Check before you act
Rates, allowances and rules change, often at the start of a tax year. It can be worth confirming every figure on the official pages linked below, and checking with your provider how your pot would be treated before taking money.
Sources
For information only. See our disclaimer and editorial standards. Spotted an error? Tell us.
