Railway wheels are commonly made from medium carbon steels (~0.55 wt.% C), heat treated to a near pearlitic microstructure with 5–10% pro-eutectoid ferrite. During the operation of freight trains, where block brakes are used, high thermal loads occur together with the high contact stresses, which combined can affect the mechanical properties of the material. In this study, the effects of annealing on local microstructure and mechanical properties in pearlitic railway wheel steel were investigated using electron microscopy and micro-hardness. It is found that after annealing at 650 °C, the room temperature hardness reduces about 25%, accompanied by significant spheroidization of cementite in the pearlitic colonies, though the size and the orientation gradients of the pearlitic colonies have not changed much. The relationship between the microstructural changes and the mechanical properties are discussed.