As you plan for retirement, you will build wealth in your SIPP. When you eventually finish working, you’ll draw from your savings to fund your lifestyle.
Understanding the various tax rules that apply when drawing from your pension is important.
For example, the Personal Allowance limits the amount of income you can generate – including from your pensions – each year before paying Income Tax in the UK. As the allowance resets at the start of the new tax year, now is a useful time for a refresher about the rules and how they might apply when you draw from your SIPP.
Read on to learn more.
You will pay Income Tax on any UK income that exceeds your Personal Allowance
As of 2026/27, the Personal Allowance in the UK is £12,570 a year.
Any income you receive up to this amount – including your salary, pension income, or property income – is tax-free.
You will then pay:
- 20% on earnings between £12,571 and £50,270
- 40% on earnings between £50,271 and £125,140
- 45% on earnings above £125,140.
The Personal Allowance is reduced for individuals with adjusted net income above £100,000 and is fully withdrawn once income reaches £125,140. The Personal Allowance tapers at £1 for every £2 of income above £100,000.
Fortunately, you can take the first 25% of your pension as a pension commencement lump sum (PCLS) before Income Tax rules apply. You can take the full 25% in one go or in smaller increments. For most individuals, the maximum tax‑free cash that can be taken is capped at £268,275 across all pension arrangements, unless a protected allowance applies.
Once you have used this lump sum, the remaining 75% of your pension funds will be taxed as income, according to the rules described above.
The Personal Allowance will remain frozen until at least April 2031
In the past, the Personal Allowance often increased in line with inflation, to ensure that the portion of your income that was subject to tax remained at approximately the same level.
However, during her recent Budget, Rachel Reeves confirmed that the Personal Allowance will remain frozen until April 2031.
This was an extension of a freeze first put in place by Rishi Sunak in 2021 – the last time the Personal Allowance increased.
Meanwhile, the cost of living has risen considerably.
This means that, if you increase the amount you draw from your SIPP each year to cover your living expenses, you could pay more Income Tax while the thresholds remain frozen.
The rules around the Personal Allowance are different if you access your SIPP overseas
If you are resident overseas, your SIPP income may be taxable in the UK, in your country of residence, or both. This depends on your tax residency status and the terms of any applicable double taxation agreement.
It’s up to you to make sure you pay tax in the correct country and don’t pay more than you need to.
When you start drawing from your SIPP abroad, you will pay UK Income Tax on any income that exceeds your Personal Allowance (after you’ve used your 25% tax-free lump sum).
However, you must apply to pay tax in your country of residence instead. If the UK has a double taxation agreement with this country, you will only pay tax once.
Where the UK has a double taxation agreement and taxing rights rest with the country of residence, it may be possible to apply for UK tax relief at source or reclaim UK tax deducted.
HMRC will issue a new tax code, so you are not charged Income Tax in the UK. It is then your responsibility to calculate and report the tax you owe to the relevant authorities in your country of residence.
The UK has double taxation agreements with many countries around the world, but not all. If you live in a country without a double taxation agreement, you could pay tax locally and back in the UK.
Before moving overseas, it is important to understand what your tax position will be when drawing from your SIPP.
Get in touch
If you plan to move overseas, our SIPPs give you more control over your retirement savings.
You can email us at [email protected] or call 03303 202091 for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
