The 25% Tax-Free Lump Sum
When you start drawing from a defined contribution pension (including SIPPs), you can take up to 25% of your total pension pot tax-free, up to a maximum of ยฃ268,275 (the lump sum allowance for 2025/26). This can be taken all at once or in stages โ 25% of each withdrawal is tax-free and 75% is taxable as income.
The tax-free element is not included in your income for other tax purposes โ it does not affect your personal allowance or push you into a higher tax band. It is genuinely tax-free. Everything above this amount is taxed as income in the year you receive it.
How the Taxable Portion Is Taxed
The taxable 75% of a pension withdrawal is added to all your other income for the year โ employment, self-employment, rental and so on โ and taxed at your marginal rate. This means a large pension withdrawal in a year with other income can push you into the higher or additional rate band.
For freelancers combining pension withdrawals with ongoing self-employment income, careful timing of withdrawals across tax years can significantly reduce the total tax paid. Spreading withdrawals over multiple lower-income years (e.g. phased drawdown) is often more efficient than taking a large sum in one year.
Emergency Tax on Pension Drawdown
The first payment from a SIPP or defined contribution pension is often subject to emergency tax โ HMRC applies a Month 1 tax code that assumes the payment will be repeated every month, resulting in significant overtaxation. You can reclaim this through Self Assessment or by submitting a P55 form to HMRC. The refund typically takes 4โ8 weeks after the end of the tax year.
SIPP Withdrawal Tax Calculator
To estimate your tax on pension withdrawals, see our dedicated SIPP withdrawal tax calculator. It factors in other income, the 25% tax-free amount and the applicable marginal rates to give you an accurate net-of-tax figure.