A guide to tax in retirement

After you’ve retired, you still have to pay Income Tax on any income over your Personal Allowance (find out more below). 

This applies to all your pension income, including the State Pension.

Many people assume that their pension income – especially the State Pension – will be tax-free, but that’s not the case.

Some income, including your State Pension, is paid without any tax being taken off. But it doesn’t mean that tax isn’t due.

If you have to pay tax on your State Pension, this will usually be collected through any personal or workplace pension you might have.

National Insurance contributions are payable from the age of 16 to State Pension age. So if you continue working beyond the State Pension age, you currently no longer pay National Insurance contributions on your earnings.

The Standard Personal Allowance is £12,570 (2023-24). This means you’re able to earn or receive up to £12,570 in the 2023-24 tax year (6 April to 5 April) and not pay any tax.

This is called your Personal Allowance. If you earn or receive less than this, you’re a non-taxpayer.

Your Personal Allowance might be higher than this if you qualify to claim Marriage and married couple’s allowance

Your Personal Allowance may be lower than this in certain circumstances – for example, if you’re a high earner and your adjusted net income is over £100,000.

You pay tax on your pension if your total annual income adds up to more than your Personal Allowance. For 2023/2024, that means if your income is over £12,570.

If you have a defined benefit pension (also known as a final salary or career average pension) you’ll be paid an income for life, which will be taxable as earnings.

You might also get a tax-free lump sum alongside this. 

When you’ve reached the age you’re allowed to access it (currently the earliest age in most cases 55, but this is increasing to 57 from 2028), you can take money out of your pension as and when you want.

However, usually only the first quarter (25%) will be tax-free. The rest is taxable as earnings. The tax rate you pay increases when your income goes over the income tax thresholds.

This means that the more money you take from your pension pot, the higher your tax bill could be.

This table gives an overview of how much tax you might pay on the money you take from your pension pot, based on the different options.  

In certain circumstances, you may be able to receive more than 25% of your pension tax-free.  

If you were a member of a pension before 6 April 2006 you may have the right to be paid a tax-free lump sum of more than 25% of the value of your pension under the scheme. To be paid the whole lump sum tax-free you will need to have lifetime allowance available when the lump sum is paid 

From 2023/24 the maximum amount which a member can take as a tax free lump sum will be frozen at £268,275 — 25% of the current standard lifetime allowance of £1,073,100.

You may be able to receive a tax-free lump sum of more than 25% of the lifetime allowance if you have applied to and received either enhanced or primary protection from HMRC with lump sum protection. Different terms and conditions apply to each of these protections. Your certificate will contain details of any lump sum protection.

If you have fixed or individual protection relating to the lifetime allowance, the amount of tax-free lump sum you can take is normally limited to 25% of the value of your protection. 

Money you take from your pot comes from your provider with the tax already taken off. Your provider will have calculated this by using your tax code. 

Your provider may also take off any tax due on your State Pension through Pay As You Earn (PAYE).

On some occasions you might pay emergency tax when you take money from your pot. You can claim this back from HMRC.  

In later life, it’s common to have income from different sources. For example, you might still work part-time and have an income from one or more pensions, as well as perhaps from some savings.

If you have income from more than one source, make sure HMRC know this – so you pay the right amount of tax against each income.

Your Personal Allowance will normally be allocated against your main job or pension – usually the income that’s more than the Personal Allowance.

If this is the case, any other income you get will all be taxed according to which tax band the other income falls into.

Details of the current tax bands for the UKOpens in a new window are on GOV.UK

Your PAYE tax code will have letters against it, which tells you how much tax will be deducted from each income source.

Do you have income from different sources below the Personal Allowance (£12,570 for 2023-24)? Then ask HMRC to spread your Personal Allowance between the different sources of income to make sure you don’t pay too much tax.

If you do overpay tax, you can claim this back at the end of the tax year.

Make sure you check the tax code(s) so you know that the right amount of tax is deducted.

Not sure whether your tax code is correct? The charity the Low Incomes Tax Reform Group have more information on their website

If you continue to work and are self-employed or your total income (including money from pensions and PAYE) is £100,000 or more for the tax year, you’ll have to fill in a Self Assessment tax return.

You’re also responsible for paying tax on other income you have, such as from property or investments. You might have to fill in a Self-Assessment tax return for that too. 

The Personal Savings Allowance, introduced in April 2016, is the amount of interest you can receive on your cash savings tax-free.

It’s currently £1,000 for basic rate taxpayers and £500 for higher rate taxpayers (there’s no allowance for Additional Rate taxpayers).

Since April 2016, banks and building societies no longer deduct basic rate tax from the interest on your savings.

Instead, if your savings income is over £1,000 for a basic rate taxpayer and £500 for a higher rate taxpayer, HMRC will collect any tax due through your PAYE code.

If you normally declare savings income through a Self Assessment tax return, you should continue to do this.

If your overall income is below the Personal Allowance (£12,570 for 2023-24), you’re also entitled to the £5,000 ‘starting rate for savings’ of 0%. This is on top of the £1,000 Personal Savings Allowance.

You can still claim back tax you’ve paid on your savings in previous years when you shouldn’t have done.

Interest or investment growth you get from tax-efficient savings accounts, such as cash ISAs, is paid tax-free – regardless of whether you’re a taxpayer.

If you have investments outside of a pension or an ISA, you might have to pay Income Tax on the investment returns (known as dividends) you receive. You might also have to pay Capital Gains tax if you sell the investments. 

There are many other organisations that can help you if you’re on a low income and need more help with your taxes:

• TaxAidOpens in a new window provides free, independent advice on tax issues for people on incomes of £20,000 a year or less.
• Tax Help for Older PeopleOpens in a new window provides free help with tax problems to those who are close to 60 and are on an income of up to £20,000.
• The Low Incomes Tax Reform GroupOpens in a new window provides guidance to people who may not be able to afford professional advice.