The ongoing freeze in income tax thresholds is pulling more people into paying more tax and at higher rates. The latest government data says there’s an estimated 39.1 million taxpayers – up 6.1 million since thresholds were frozen in 2021/22. Within this, 8.7 million are over state pension age – up 29% since the freeze.
But, there are ways that you can minimise your income tax bill in retirement.
This article isn’t personal advice. Pension, ISA, and tax rules can change, and benefits depend on your circumstances. You can normally access the money in a pension from age 55 (rising to 57 in 2028). If you’re not sure if an action is right for you, ask for financial advice.
Know your allowances
For starters, the first £12,570 you earn each year is tax free. The full new state pension is £11,973 per year (2025-26) so if you’re taking any income on top of the state pension, then depending on where it comes from, you will likely be in tax paying territory.
If you’re a basic rate taxpayer, you’re entitled to up to £1,000 in interest from savings accounts each year without paying tax. Higher-rate taxpayers can get up to £500 but additional rate taxpayers don’t have this allowance.
The first £500 of dividend income is free of tax in the current tax year and you can also realise up to £3,000 in gains before you need to pay capital gains tax (CGT).
Make use of your savings and investment accounts
Pensions will form the mainstay of your retirement income and they come with the valuable benefit of being able to take up to 25% of it as a tax-free lump sum. You can use this tax-free cash alongside the taxable income you draw from your pension to minimise your tax bill.
For free, impartial guidance on accessing your pension, the government’s Pension Wise service is available if you're over 50.
Added to this, income from Cash ISAs can be taken free of income tax while Stocks and Shares ISAs are free of income, capital gains and dividend tax. These vehicles used together can minimise the amount of tax you pay.
People under the age of 65 looking to make use of Cash ISAs to supplement their future retirement income should note that from April 2027 the annual Cash ISA allowance will be cut to £12,000. But those over 65 will still be able to subscribe up to £20,000 to a Cash ISA.
Shelter your investments with Share Exchange
If you’re invested outside an ISA, then you could end up paying tax on any dividends or profits.
So, you could use our Share Exchange service (sometimes called Bed and ISA or Bed and SIPP) to sell then buy back the investments within your ISA or SIPP and potentially save yourself some future tax.
While the ISA and SIPP do offer protection from CGT, selling the shares to move them into one can result in a capital gain or loss. If your gains are more than the £3,000 capital gains tax allowance you might need to pay tax on those gains. There are a couple of other considerations to look into on this before you go ahead.
Plan together
If you’re married or in a civil partnership, you can also save tax by making the most of each other’s allowances.
For instance, you will have two tax free personal allowances to use and personal savings allowances. You can also make full use of having two ISA allowances to continue building your wealth.
It’s also possible to transfer assets between spouses or civil partners on a “no gain no loss” basis to make the most of both of your CGT allowances.
But full ownership needs to change in these transfers and they’re only available to spouses/civil partners living together. If you’re cohabiting the bad news is that you will be unable to make use of this allowance.
Think about investing for income
Funds focused on investing for income are an easy way to access a diversified range of assets paying regular income. There’s also the potential for long-term capital growth.
Consider your investment objectives and whether your portfolio is working towards the same goals that you are. Remember, the value of investments can go up and down, so you could get back less than you invest.