Retiring doesn’t mean your tax worries disappear – they just change shape. Suddenly you’re looking at pension draws, state pension, ISAs, and maybe rental income. Knowing which bits are taxed and which aren’t can keep more money in your pocket.
Pension pots: When you start pulling money from a private pension, the first £12,570 a year is covered by your personal allowance (if you haven’t used it elsewhere). Anything above that is taxed at your marginal rate – 20% for basic‑rate earners, 40% for higher‑rate, and 45% for the top band.
Tax‑free cash (PFL): Most people can take up to 25% of their pension pot tax‑free as a lump sum. It doesn’t count towards your allowance, so it’s a handy way to boost savings or clear debt without a tax hit.
State pension: The state pension is taxed just like any other income. It uses up part of your personal allowance, but if your total income stays under the allowance, you pay nothing.
ISAs: Money in an ISA stays tax‑free, even when you withdraw it in retirement. That includes interest, dividends, and capital gains. If you’ve got cash or stocks in an ISA, you can use it to supplement your pension without raising your tax bill.
Other income: Rental earnings, dividends from shares, and part‑time work all add to your taxable total. Dividends have a separate £1,000 dividend allowance (as of 2025). Anything above that is taxed at 8.75%, 33.75% or 39.35% depending on your band.
1. Spread withdrawals: Instead of taking a big lump sum, consider smaller, regular draws that stay under your personal allowance. This keeps you in the 20% band longer.
2. Use the 25% tax‑free cash wisely: Pay off high‑interest debt or fund an ISA. Both moves reduce future taxable income.
3. Claim all allowances: If you’re over 65, you get an extra £1,250 personal allowance (the “over‑65 allowance”). Make sure your accountant applies it.
4. Consider a pension “trickle‑down”: Some people move into a lower‑tax band by delaying pension draw until after age 75, when the personal allowance drops but other incomes may be lower.
5. Watch the £12,570 limit: If you have multiple income streams, add them up before you decide how much to pull from your pension. Going over the limit pushes you into a higher tax bracket.
6. Think about gifting: Giving money to a spouse or civil partner can balance incomes, keeping both of you in lower tax bands.
7. Review annually: Tax rules change, and so does your income. A quick check each tax year can reveal new allowances or reliefs you missed.
Retirement income taxes might feel like a maze, but with a few simple steps you can keep more of what you’ve earned. If you’re unsure about any part, a local accountant can tailor advice to your situation. Stay on top of your allowances, use tax‑free cash wisely, and watch those extra earnings add up without the surprise of a bigger tax bill.
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