Amid everything else you’re thinking about as you prepare for retirement, tax might not even cross your mind. You may even think it’s not something that will affect you once you stop working.
Yet the income you receive in retirement could be taxed and a growing number of retirees are paying higher rates.
According to an article from Pensions Age (1 September 2026), the number of pensioners paying the higher rate of Income Tax (40% in 2026/27) doubled in five years. The number paying the additional rate of Income Tax (45% in 2026/27) tripled during the same period.
You don’t need to receive a large income from a private pension to be liable for Income Tax. In fact, if you’re eligible for the full State Pension in the 2027/28 tax year, it will provide an annual income of £13,036.40.
In the 2026 Budget (28 October 2026), the government announced the Pension Tax Allowance, which will come into force in April 2027. Pensioners whose income is at or below the full State Pension will not be brought into paying tax as a result of State Pension uprating, even where the income exceeds the usual Personal Allowance threshold.
However, as most pensioners supplement their State Pension with other income streams, you could benefit from considering how you’ll manage your tax liability in retirement.
What income in retirement could be taxed?
Crucially for retirees, it’s not just your salary that’s liable for Income Tax. In fact, it covers most forms of income you receive, including pension withdrawals, rental payments from properties, and the interest your savings earn if it exceeds the Personal Savings Allowance.
Depending on your circumstances, you could be subject to other taxes too.
For example, if you receive dividends, you may pay Dividend Tax if the total exceeds certain thresholds, or you could be liable for Capital Gains Tax (CGT) if you dispose of assets, such as investments not held in a tax-efficient wrapper or property that isn’t your main home.
So, overlooking tax as part of your retirement plan could mean your finances aren’t as efficient as they could be.
3 practical ways to manage tax in retirement
1. Manage your pension withdrawals with tax thresholds in mind
Being able to access your pension is exciting. However, before you make withdrawals, you could benefit from thinking about how you’ll use the money and whether you need it now.
Withdrawals from your pension will usually be considered income, and as a result, could be subject to Income Tax. Keeping your total withdrawals below the relevant tax thresholds each tax year could minimise your bill. If you’re intending to take the money out to simply place it in a cash account, it could make more sense to leave it in your pension.
In 2026/27, the Income Tax bands in England, Wales, and Northern Ireland are:
- Personal Allowance (0%): Up to £12,570
- Basic rate (20%): £12,571 to £50,270
- Higher rate (40%): £50,271 to £125,140
- Additional rate (45%): More than £125,140
Please note that Scotland has different tax rates and bands.
If you’ve taken £50,000 from your pension in the current tax year, you might delay further withdrawals until the start of 2027/28 to avoid being pushed into the higher-rate tax band.
Remember that it’s not just your pension that affects your Income Tax band, so tracking all forms of income could be useful.
2. Plan with your partner to improve tax efficiency
If you have a spouse or civil partner, planning for retirement together could present opportunities for tax efficiency.
You may have used the Marriage Allowance while you were working and if you meet the criteria in retirement, you could continue to do so. The Marriage Allowance lets a person transfer £1,260 of their tax-free Personal Allowance to a husband, wife, or civil partner if it is unused. The higher earner’s income must be between £12,571 and £50,270. Using this allowance could save you up to £252 a year.
In addition, many tax allowances and exemptions are individual and you can typically pass assets to your spouse or civil partner without triggering a tax charge. Working together could help you identify how you might use both your allowances to improve tax efficiency.
For example, if you hold investments outside a tax-efficient wrapper that you want to dispose of, you might pass them to your partner first. Each tax year, you can dispose of assets and realise gains of up to £3,000 before CGT may be due, thanks to the Annual Exempt Amount. If you’ve already used this exemption, your partner could dispose of the assets and use theirs.
3. Use your ISA to supplement your pension income
An ISA is a tax-efficient way to save or invest. You won’t pay Income Tax on interest from savings or CGT on investment returns within an ISA.
You’re also not charged tax when you withdraw money from an ISA. As a result, if you’ve built up savings or investments in an ISA, it could be a useful way to supplement your other sources of income without increasing your tax bill.
It’s also worth noting that pensions provide a tax-efficient way to invest. Before withdrawing money from your pension, consider how you’ll use it. If you intend to invest it, leaving it in your pension could make more sense.
Have questions about paying tax in retirement?
We’re here to help you navigate this new chapter of your life, including managing your tax liability. Please get in touch to talk to us.
Please note: This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate tax planning.
