How Are SIPP Withdrawals Taxed in the UK? (with Examples)

By Team SalaryCalculate · 7/10/2025

Withdrawing money from a Self-Invested Personal Pension (SIPP) offers flexibility — but it also brings tax implications. While part of your pension can be taken tax-free, the rest is treated as income and taxed under PAYE rules. In this article, we explain exactly how SIPP withdrawals are taxed, what to expect in your first year, and how to avoid common mistakes.

What Part of a SIPP Is Tax-Free?

You can usually take 25% of your SIPP tax-free, either as:

A single lump sum (Pension Commencement Lump Sum)
Multiple smaller withdrawals (phased drawdown or UFPLS)

The remaining 75% is taxable as income at your marginal tax rate.

More: How Much of My SIPP Is Tax-Free?

How the Tax Works

Withdrawals from a SIPP are taxed like regular income through the Pay As You Earn (PAYE) system:

Your pension provider applies a tax code from HMRC
If no code is available, an emergency tax code is often used
This can result in overpaying tax initially, which you can reclaim

More: GOV.UK – Tax on private pensions

Emergency Tax: Why It Happens

First-time SIPP withdrawals often trigger an emergency tax code:

HMRC assumes you’ll earn the same amount every month for the rest of the year
This results in higher monthly deductions

Example:

You take £10,000 from your SIPP in one go. HMRC assumes you’ll take £10,000 every month = £120,000 annual income.

You’re taxed as if you’re a high earner
You overpay tax unless you reclaim it

More: GOV.UK – Claim back overpaid tax

SIPP Taxation Examples

1. Basic Rate Withdrawal

SIPP pot: £80,000
Withdrawal: £20,000 (£5,000 tax-free, £15,000 taxable)
Income this year: £25,000 salary + £15,000 pension = £40,000
Taxable withdrawal sits in basic rate band = 20% tax

2. Higher Rate Triggered

SIPP pot: £200,000
Withdrawal: £60,000 (£15,000 tax-free, £45,000 taxable)
Income this year: £55,000 salary + £45,000 pension = £100,000
Part of pension is taxed at 40%

3. Low-Income Pensioner

No other income
Withdraws £16,000: £4,000 tax-free, £12,000 taxable
Uses personal allowance (£12,570)
May pay no tax depending on timing and PAYE code

How to Minimise Tax on Withdrawals

Withdraw in stages: Spread income over multiple tax years
Time withdrawals to stay within lower tax bands
Coordinate with other income (e.g. salary, rental income)
Use tax code adjustments via Self Assessment
Reclaim overpaid tax using HMRC forms (e.g. P55, P53Z)

More: GOV.UK – P55 Form

The Role of the Personal Allowance

You can earn up to £12,570 tax-free each year (2024/25) under the personal allowance.

If your only income is from your SIPP, this allowance applies after you’ve used your 25% tax-free amount.

Tip: Combine tax-free lump sums with your personal allowance to avoid paying any tax.

What If You Keep the Money Invested?

Keeping your funds in drawdown doesn’t trigger tax.

Tax is only applied when you take money out
You control the timing and amount of taxable income

Summary

SIPP withdrawals are taxed as income, but the first 25% is tax-free. The amount you pay depends on how much you take and your total income for the year. Timing and strategy matter — especially to avoid emergency tax or triggering higher tax rates unnecessarily. Use calculators, HMRC tools, and careful planning to make your withdrawals as tax-efficient as possible.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Speak to a qualified adviser before making pension decisions.