You’ve decided to take £20,000 from your pension.
You’ve worked out what you want to use the money for, requested the withdrawal and waited for it to arrive.
Then you check your bank account.
It’s considerably less than you expected.
For many people, their immediate reaction is: “Where has all that tax gone?”
The answer may be emergency tax.
It can come as an unpleasant surprise, particularly if this is the first time you’ve taken money from your pension. But a large tax deduction doesn’t necessarily mean that’s the amount of tax you will ultimately owe.
Here’s why it happens, what you can do about it and, importantly, why planning pension withdrawals can make a significant difference.
Why might my pension provider use an emergency tax code?
When you take taxable money from a pension, your pension provider normally deducts Income Tax through PAYE, in much the same way as an employer deducts tax from your salary.
The problem is that when you make your first flexible pension withdrawal, the provider may not yet have the correct tax code from HMRC.
HMRC rules therefore require pension providers in many circumstances to use an emergency tax code on a “Month 1” basis for that first payment.
This essentially means the tax calculation looks at that payment in isolation rather than taking account of your income across the whole tax year.
And that’s where things can start to look rather alarming.
Why can the first withdrawal be taxed so heavily?
Imagine you make a relatively large pension withdrawal in one month.
Under an emergency Month 1 tax code, the PAYE system effectively gives you only one month’s worth of the relevant annual tax allowances and bands when calculating the tax on that payment.
It does not initially know that this could be the only pension withdrawal you’re planning to make all year.
So a one-off withdrawal can temporarily look, for tax purposes, like the start of a much higher level of regular income.
HMRC explains that under an emergency code, tax is calculated based on what you’re paid in that particular week or month, rather than your total income for the tax year. (GOV.UK)
The result?
You could initially pay more tax than you actually owe.
That can be frustrating, especially if you had earmarked a specific amount for a holiday, home improvements, helping family or another major expense.
One-off pension withdrawal or regular income?
This distinction is important.
If you’re starting to take a regular monthly income from your pension, HMRC can issue an updated tax code to your pension provider. Future payments can then be adjusted using the appropriate code.
HMRC states that after an initial flexible pension payment, it can issue a tax code for future payments. (GOV.UK)
A one-off withdrawal can be different.
If you take one payment and don’t intend to take another for some time, there may not be a future pension payment through which an overpayment can quickly be corrected.
So you may need to take action yourself.
Will HMRC automatically give me the tax back?
Sometimes the position can be corrected through PAYE once HMRC has the necessary information and a revised tax code is being used.
But you shouldn’t assume that an overpayment will immediately find its way back into your bank account.
If you’ve made a one-off flexible withdrawal and paid too much tax, you may be able to reclaim it during the tax year rather than waiting for everything to be reconciled later.
The correct process depends on what you’ve done with your pension.
For example, HMRC currently uses different forms depending on whether you have taken part of your pension pot or emptied it completely, and whether you have other income. These include forms P55, P53Z and P50Z.
You can find the relevant guidance through HMRC’s pension tax refund guidance on GOV.UK.
And this isn’t an unusual problem. Between April and June 2026 alone, HMRC processed pension flexibility repayment claims worth more than £50 million.
Emergency tax isn’t the only potential problem
It’s easy to focus on overpaying tax when taking money from a pension.
But the opposite can happen too.
You could make a withdrawal, see that tax has already been deducted and assume everything has been dealt with.
Not necessarily.
Your final Income Tax position depends on your total taxable income for the entire tax year.
That could include income from:
- employment
- pensions
- State Pension
- rental property
- savings and investments where taxable
- other taxable income.
This becomes particularly important if you’re planning several large pension withdrawals during the same tax year.
Several withdrawals could push you into a higher tax band
Suppose you need a substantial amount of money and decide to take it from your pension in stages.
Each withdrawal might look manageable on its own.
Added together — and combined with your other taxable income — they could tell a very different story.
A large pension withdrawal can push some of your income into a higher tax band, and GOV.UK warns that taking a large amount from a private pension may result in higher-rate tax or additional tax being due at the end of the tax year.
That’s why the question shouldn’t simply be:
“How much can I take from my pension?”
A better question is:
“What’s the most appropriate way to take the money I need?”
Your pension doesn’t exist in isolation
This is where pension withdrawal planning becomes particularly valuable.
Imagine you want £40,000 for a major purchase.
Taking the entire £40,000 as taxable pension income isn’t necessarily the only option.
Depending on your circumstances, you might have cash savings, ISAs, investments, tax-free pension cash or other assets available.
You may also have the option of spreading pension withdrawals across tax years rather than taking everything at once.
The right approach will depend on your individual circumstances, but looking at the whole financial picture can help you understand the tax consequences before you press the withdrawal button.
Think about the tax year, not just the withdrawal
Before taking a significant amount from your pension, it can help to map out what the rest of the tax year looks like.
- Are you still working?
- Will you receive a bonus?
- Are you already drawing another pension?
- Have you started receiving your State Pension?
- Are you planning another large pension withdrawal later in the year?
- Could some of the money wait until after 6 April?
These questions can make a surprisingly large difference.
For example, someone retiring part-way through a tax year may have already earned several months’ salary. Taking a substantial pension withdrawal immediately afterwards could increase their taxable income considerably.
Waiting until a new tax year, or taking a different combination of income and capital, may produce a different result.
That doesn’t mean delaying a withdrawal is always the right answer. It simply means understanding the numbers before making the decision.
Don’t let the tax tail wag the retirement dog
Tax matters, but it shouldn’t be the only consideration.
Your pension is there to help fund your retirement and the life you want to live.
Sometimes taking a larger withdrawal and paying the tax is entirely appropriate.
What you want to avoid is paying unnecessary tax because withdrawals haven’t been planned alongside your other income.
A good retirement income strategy should consider how much you need, when you need it, where it should come from and what the tax consequences could be.
Planning before withdrawing can avoid surprises
Pension flexibility gives people far more choice over how they use their retirement savings.
But flexibility also puts more responsibility on you to make decisions about when and how to take your money.
Before making a significant pension withdrawal, it can therefore be worth looking at:
Your total income for the tax year.
Not just the pension payment you’re about to take.
Your likely tax position.
Could the withdrawal move some of your income into a higher tax band?
Other assets available to you.
Does all the money need to come from your pension?
Future withdrawals.
Are you likely to need another large amount later in the same tax year?
Timing.
Would spreading withdrawals across different tax years be worth considering?
Your wider retirement plan.
What effect will taking money now have on the income and assets available to you later?
Before you press “withdraw”
Seeing a large amount of tax deducted from your first pension payment can be worrying.
But emergency tax doesn’t necessarily mean you’ve lost that money permanently. It may simply mean the PAYE system didn’t yet have enough information to calculate your tax accurately.
The bigger lesson is that taking money from a pension isn’t just about deciding how much you want to withdraw.
It’s about understanding how that withdrawal fits alongside your salary, other pensions, State Pension and wider assets — both now and over the rest of the tax year.
At Lazenby’s Financial Services, we can help you look at the bigger picture and plan pension withdrawals as part of your overall retirement strategy.
Because when you’ve spent years building up your retirement savings, it makes sense to think carefully about how you take them out too.
The information in this article is for general information only and should not be considered personal financial or tax advice. Tax treatment depends on individual circumstances and may change in the future.
