The Hidden Tax Trap in Pension Withdrawals
There’s a tax rate in the UK that doesn’t appear on any HMRC rate card. It’s 60%.
If you’re withdrawing from a pension and your total income lands between £100,000 and £125,140, you’re in the zone. Most people don’t know it exists until they get their self-assessment bill.
How the 60% rate works
Everyone in the UK gets a Personal Allowance of £12,570 — the amount you can earn tax-free each year. But once your adjusted net income exceeds £100,000, HMRC starts clawing it back. For every £2 you earn above £100,000, you lose £1 of Personal Allowance.
By the time you reach £125,140, your Personal Allowance is zero.
That means across the £25,140 between £100,000 and £125,140, you’re simultaneously:
- Paying 40% income tax on the additional income (because you’re in the higher rate band)
- Losing Personal Allowance worth 20% in extra tax (because each £2 earned removes £1 of allowance that was sheltering income at the basic rate)
40% + 20% = 60% effective marginal rate.
That’s higher than the additional rate of 45% that applies above £125,140. You pay a higher effective tax rate between £100k and £125k than someone earning £200,000 pays on their income above £125k.
Why pension withdrawals make this worse
For someone still working, salary is broadly fixed — there’s no way to dial it up or down to sidestep the taper. But pension withdrawals are different. The amount drawn each year is a choice.
A large SIPP drawdown in a single year can push total income into the 60% zone. An extra £10,000 drawn down doesn’t cost £4,000 in tax (at 40%). It costs £6,000.
And it’s not just SIPP drawdown. The taper catches income from all sources in the same tax year:
- State pension (up to £12,548 for the full new state pension in 2026/27)
- Workplace or DB pensions
- Employment income if you’re still working part-time
- Rental income from a buy-to-let
- Dividend income from a GIA
- UFPLS withdrawals (75% of which are taxable)
They all stack. A combination that individually looks modest can collectively push you over £100,000.
A worked example
Consider someone aged 62, recently retired, with the following income in a single tax year:
| Source | Amount |
|---|---|
| DB pension (100% taxable) | £18,000 |
| Rental income | £12,000 |
| SIPP crystallised drawdown (100% taxable) | £75,000 |
| Total taxable income | £105,000 |
Without the taper, the tax bill would look like this:
| Slice | Rate | Tax |
|---|---|---|
| First £12,570 (Personal Allowance) | 0% | £0 |
| £12,571 – £50,270 (basic rate) | 20% | £7,540 |
| £50,271 – £105,000 (higher rate) | 40% | £21,892 |
| Total | £29,432 |
But the taper kicks in. Income exceeds £100,000 by £5,000, so the Personal Allowance reduces by £2,500 (half of £5,000). The new Personal Allowance is £10,070.
In the UK tax system, the basic rate band has a fixed width of £37,700 (ITA 2007 s.10). When the Personal Allowance shrinks, the higher rate threshold drops with it. The basic rate now covers £10,071 to £47,770 (still £37,700 wide), and the higher rate starts at £47,771 — not £50,271.
This means £2,500 of income that was sheltered at 0% moves to 20%, and £2,500 of income that was at 20% gets pushed into the 40% band.
| Slice | Rate | Tax |
|---|---|---|
| First £10,070 (reduced PA) | 0% | £0 |
| £10,071 – £47,770 (basic rate, £37,700 wide) | 20% | £7,540 |
| £47,771 – £105,000 (higher rate) | 40% | £22,892 |
| Total | £30,432 |
That extra £5,000 above £100,000 produced £3,000 in additional tax — a 60% effective rate.
At £155,000 total income, the Personal Allowance would be completely wiped out. The higher rate threshold drops to £37,700 (the basic rate band width alone), and the full £12,570 that was sheltered at 0% becomes taxable — costing an additional £2,514 (£12,570 × 20%) on top of the higher rate, purely because of the taper.
The real cost over a retirement
This isn’t an academic curiosity. For someone drawing down a SIPP over 20-30 years, the taper can account for tens of thousands of pounds in additional tax, depending on annual income levels.
Consider two withdrawal patterns applied to the same £500,000 SIPP:
Pattern A: Steady withdrawals of £50,000 per year alongside a £55,000 DB pension. Total income: £105,000. Income lands in the taper zone every year.
Pattern B: Larger withdrawals in early retirement (before DB pension starts), smaller withdrawals later. £70,000 per year from the SIPP in years 1-5 (total income £70,000, below the taper), then £30,000 per year once the DB pension kicks in (total income £85,000, also below the taper).
Both patterns draw the same total amount from the SIPP. Under the stated assumptions, Pattern A generates taper-zone tax in every year, while Pattern B does not. The difference arises from the timing of income relative to the £100,000 threshold — not from any inherent advantage of either pattern. Individual circumstances (health, other income, future tax changes) could shift the outcome in either direction.
It gets more complicated with couples
If you’re planning retirement as a couple, the taper creates another layer of complexity. One partner might be deep in the taper zone while the other has unused Personal Allowance. The order in which each person draws from their respective SIPPs, ISAs, and other accounts can dramatically change the household tax bill.
This is one of the reasons I built FutureClear to model couples jointly — not as two separate individuals who happen to live together. The engine calculates tax for each person independently but models the household’s withdrawal pattern as a coordinated whole.
What the taper looks like in a year-by-year projection
The taper is easy to miss because it’s invisible in simple calculations. There’s no “60% band” in the HMRC rate tables. It only shows up when income is modelled year by year.
A year-by-year projection surfaces it by showing:
- All income sources aggregated per tax year — not just pension drawdown, but state pension, DB pensions, rental income, dividends, everything
- Years where the total crosses £100,000, even briefly
- Transition years — when state pension begins or a large SIPP crystallisation occurs — where the total can spike unexpectedly
- The 75% taxable proportion of any UFPLS withdrawals (a £50,000 UFPLS withdrawal adds £37,500 to taxable income, not £50,000)
FutureClear’s year-by-year engine models the taper precisely — £1 of Personal Allowance lost for every £2 above £100,000, applied to every income source, recalculated every year. This makes the taper visible in the projection output for each year of a retirement scenario.
For a deeper look at how the tax engine works, see our previous post: How We Calculate UK Tax Year-by-Year.
What this means
The Personal Allowance taper is one of the most consequential features of the UK tax system for retirees, and one of the least visible. Understanding how it interacts with year-by-year income levels can substantially affect how a retirement scenario models out.
There’s no single “right” withdrawal pattern — it depends entirely on individual circumstances. But the taper is a mathematical feature of the tax system that any serious projection needs to account for.
Nothing in this post constitutes financial or tax advice. FutureClear is a modelling tool, not a tax adviser. The scenarios described above are illustrative and based on published HMRC rates and thresholds for the 2026/27 tax year. Your actual tax position depends on your individual circumstances. If in doubt, consult a qualified tax professional.