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Extreme rainfall and flood events are predicted to increase in frequency and severity as a consequence of anthropogenic climate change. In UK upland areas, historical over‐grazing and associated soil compaction have further exacerbated peak flood levels and flash‐flood risk along many river catchments. As a result, the reinstatement of upland woodland is increasingly seen as a key component of an integrated suite of options forming part of natural flood management (NFM) associated with a 'public money for public goods' approach to European agriculture. Nevertheless, understanding the impact of native woodland establishment on upland soil hydrology remains relatively poor. We compare physical and hydrological properties from the surface soils of establishing woodland and grazed pasture across four flood vulnerable upland headwater catchments in Dartmoor National Park, SW England. We show upland native woodland establishment is a viable soil recovery option, with a doubling of soil saturated hydraulic conductivity, increased 'wetness threshold' and reduced surface soil compaction and bulk density within 15 years of establishment. Our study supports the establishment of native woodland as an effective tool to improve the hydrological functioning of soils in upland pastoral catchments and the provision of flash‐flood mitigation 'ecosystem services'. We caution, however, that land managers and policymakers must consider past and present management, soil type and catchment location when planning new NFM schemes if environmental benefits are to be maximised and 'public money for public goods, are to be commensurate with outcomes. [ABSTRACT FROM AUTHOR]