When you retire, you will likely draw an income from several sources to fund your lifestyle. You may have workplace or private pensions, as well as other savings and investments you can rely on, and you could receive some State Pension too.
It’s important to consider how you generate your income and the level of tax you’re likely to pay in retirement. If you don’t plan effectively, you could pay more tax than necessary, meaning you deplete your savings faster than expected.
This might be more likely to happen in the future as Professional Paraplanner reports 12 million pensioners could face higher tax bills soon.
Read on to learn why this is and what you can do about it.
You could pay Income Tax on wealth from your personal pensions and State Pension
We typically think of Income Tax as a levy on earnings from employment but it applies to income from other sources too, including any private or workplace pensions, and the State Pension.
The amount of Income Tax you pay is calculated based on several brackets, meaning you pay a different percentage of tax on certain portions of your income. Luckily, any income up to your Personal Allowance is tax-free.
This means that in 2025/26, you will pay:
- 0% on income up to the Personal Allowance of £12,570
- The basic rate of 20% on taxable income between £12,571 to £50,270
- The higher rate of 40% on taxable income between £50,271 and £125,140
- The additional rate of 45% on taxable income that exceeds £125,140.
When drawing from your pensions in retirement, you may need to consider how much of your income will exceed the Personal Allowance, and what tax you could pay.
Changes to the State Pension amount could mean you pay more Income Tax in the future.
An increase to the State Pension means 12 million pensioners could face higher tax bills
The State Pension may not be your primary source of income in retirement, but it’s a useful supplement to your other savings, especially as you receive the payments for the rest of your life.
What’s more, the State Pension amount normally increases every year because of the “triple lock”.
This means the amount you receive rises by the highest of:
- Average wage growth
- The rate of inflation
- 2.5%.
According to Professional Paraplanner, an estimated 12 million pensioners benefited from the 4.1% increase that came into effect on 5 April 2025.
While this may mean your income increases as the cost of living rises, you might also pay more Income Tax as a result.
Indeed, the full State Pension amount in 2025/26 is now £230.25 a week, or £11,973 a year.
Consequently, if you claim the full State Pension amount, you have already used a significant portion of your Personal Allowance. As you draw from personal or workplace pensions, more of your income could exceed the threshold, meaning you pay more Income Tax.
It’s also worth noting that the Personal Allowance is currently frozen until April 2028. If the State Pension continues increasing in this time, as it’s likely to do, the full amount could eventually exceed the Personal Allowance.
Rising living costs could mean you need to draw more from your pensions
You have likely seen news stories about high inflation in recent years and may have noticed some of your own expenses increasing. These rising living costs might affect how much you need to draw from your pensions to fund your lifestyle.
For instance, the Bank of England (BoE) inflation calculator shows that the same goods and services that cost £30,000 in 2020 would cost £37,547.12 in March 2025.
So, if you want to maintain the same quality of life, you might need to draw increasing amounts from your pensions to fund your lifestyle. As a result, more of your income could exceed the Personal Allowance, especially while the threshold remains frozen.
This effect of inflation, coupled with the rising State Pension amount, could mean you face an increasingly high Income Tax liability in retirement.
Fortunately, with our support, you may be able to reduce your bill.
We can help you find ways to mitigate Income Tax in retirement
There are several ways we can help you mitigate Income Tax in retirement.
Firstly, we may review your budget to ensure you’re only drawing the necessary income to fund your lifestyle and leaving the rest in your pensions.
This means you avoid paying Income Tax on wealth that you didn’t need to withdraw in the first place. Also, the rest of your savings remain invested and could continue growing.
Beyond budgeting, we can also help you find more tax-efficient ways to draw from your savings.
For instance, you can normally draw the first 25% of your pensions as a tax-free lump sum, up to the Lump Sum Allowance (LSA) of £268,275 in 2025/26. You can typically choose whether to take this all at once or in smaller amounts.
Any wealth you draw from the remaining 75% of your pensions, and which exceeds your Personal Allowance, is subject to Income Tax at your marginal rate.
Depending on your pension provider, you may be able to draw from the tax-free and taxable portions of your pension at the same time, and this might help you mitigate Income Tax.
If you wanted to release £20,000 from your pension, for example, you could take £10,000 from the tax-free lump sum and £10,000 from the taxable portion. Provided you had no other taxable income in that year, your earnings would be within your Personal Allowance and wouldn’t pay tax.
Naturally, if you’re claiming the State Pension and drawing additional funds from your own pensions, you will likely exceed your Personal Allowance and pay some Income Tax. Still, planning in this way could help you reduce the amount you pay.
Bear in mind this strategy is more suited to early retirement while you still have your tax-free lump sum left. Fortunately, you might have other tax-efficient sources to draw from, such as ISAs, throughout your retirement.
Using a combination of careful budgeting, your tax-free lump sum, and your ISA savings, you may be able to reduce the tax you pay on the income you generate in retirement. We can give you crucial guidance in this area.
Get in touch
If you are concerned about the level of Income Tax you will pay in retirement, we can discuss solutions with you.
Please contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2025 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients 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 Financial Conduct Authority does not regulate tax planning.
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. Past performance is not a reliable indicator of future performance.
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.
Workplace pensions are regulated by The Pension Regulator.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
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.