Coronavirus - we're here to help
From how to access your account online, scam awareness, your wellbeing and our community we're here to help.

Skip to main content
  • Register
  • Help
  • Contact us
  • Log in to HL Account

How to reduce your tax bill in retirement

If you’d like to keep your tax bill to a minimum we offer five points to consider. Read article.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

No one likes paying more tax than they need to, especially when it’s from their hard earned savings.

HMRC collected £569.3bn in taxes in the 2016/17 tax year. This includes tax deducted from pension income, interest from cash savings and investment income.

Understanding how tax works, and how to take advantage of allowances, is key to keeping your tax bill to a minimum. We offer five points to consider.

Pensions and tax rules can change and any benefits will depend on individual circumstances. If you are in any doubt as to the best course of action for your circumstances, you should seek personal advice.

How to save tax in retirement guide

1. Take full advantage of your tax-free cash entitlement

It is usually possible to take up to 25% of your pension tax free from age 55 (57 from 2028). You can choose to receive this all in one go or in stages.

It’s even possible to take just your tax-free cash and postpone taking further income until a later date. This could be particularly useful if you decide to reduce your working hours rather than give up work completely. Tax-free cash could be used to subsidise the difference in income.

Our options at retirement guide explains the different ways you can access your tax-free cash entitlement.

Your options at retirement guide

2. Be mindful of pension withdrawals – they are taxable

New rules introduced in 2015 mean you can withdraw as much income as you like from your pension and vary the amount you take in line with your needs. However, there’s a sting in the tail. The way the tax system works means you could pay up to 45% tax on your initial withdrawals.

Understanding the rules, and spreading your withdrawals over a number of tax years could save you a substantial amount of money.

Read our free factsheet, 'How are pension withdrawals taxed?' or try our income tax calculator to see how much income tax you might pay if you take a lump sum from your pension.

3. ISAs can shelter your cash and investments from tax (plus withdrawals are tax free)

Interest received from cash savings over your personal savings allowance is taxable. Likewise, income gained from equity based investments is subject to dividend tax if over £5,000 (set to fall to £2,000 from April 2018).

However, within an ISA (such as our Vantage Stocks & Shares ISA) you pay no UK tax on income or capital gains. Paying less tax could mean higher returns for you (and less paperwork if you need to complete a tax return).

Investing as much as you can in an ISA each tax year could allow you to build up a sizeable tax free investment. There is no upper age limit to be eligible for a Cash ISA or Stocks & Shares ISA, and you can make tax-free withdrawals whenever you need to. The amount you can invest in the 2017/18 tax year is £20,000. Unlike cash, investments will fall as well as rise in value so you could get back less than you invest.

Find out more about tax on cash savings, investment income and investment gains held outside of an ISA in our free guide.

How to save tax in retirement guide

4. Make full use of your tax allowances as a couple

If you are married or in a civil partnership, you may be able to save tax by making the most of each other’s allowances and tax bands. This could involve transferring investments between you, often to the spouse or partner who pays less tax.

Download your free guide to find out more: How to save tax in retirement

5. Be smart and plan for tax after death

Inheritance tax is the tax owed on your estate, which includes the total value of your property, savings, investments and possessions, after you die. The current threshold for inheritance tax is £325,000, meaning any portion of your estate in excess of this could be taxed at 40%. An additional threshold of £100,000 (2017/18 tax year) may be available if you own your home.

One way to reduce the amount of tax payable, is to reduce the value of your estate. This could include making gifts or contributing to a pension, where payments after death could be free of income tax and inheritance tax.

Remember, inheritance tax planning is complex. It is one of the main reasons investors come to Hargreaves Lansdown for personal advice. You should not make any decisions based solely on the above.

Get your free download: "How to save tax in retirement" A plain English guide outlining how to save tax in retirement. Claim your guide

This article, including our guides and calculator, is not personal advice. What you do with your pension and savings is an important decision. Therefore, we strongly recommend you understand your options and check your chosen option is suitable for your circumstances: take appropriate advice or guidance if you are at all unsure.

Pension Wise, the government's pension guidance service, provides a free impartial service to help you understand your options at retirement - more on Pension Wise.

We offer a range of information and support to help you plan your own finances. If you would like personal advice, our award-winning team of Financial Advisers can help you achieve your goals. You only pay for the advice you need.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Editor's choice – our weekly email

Sign up to receive the week's top investment stories from Hargreaves Lansdown. Including:

  • Latest comment on economies and markets
  • Expert investment research
  • Financial planning tips
Sign up

Related articles

Category: Pensions

Quit your job to start your own business? Don’t leave your old workplace pension behind

Top tips for understanding your old workplace pensions, how to find them and your options for transferring.

Isabel McDougall

21 Oct 2020 5 min read

Category: Active Savings

Over £3.5bn could be missed in savings interest – how to avoid missing out

Are you one of the many getting a poor interest rate? Here’s how you could improve your returns, and get cashback too (terms apply).

Sarah Coles & Ryan Kenny

21 Oct 2020 min read

Category: Investing and saving

Are your investments diversified enough for the second wave?

Stock market turbulence around the corner? Here’s how you can help get ready to weather any potential stock market storms.

Hannah Duncan

19 Oct 2020 6 min read

Category: Investing and saving

Lockdown savings? How to use them to take control of your financial future

Lockdown turned some of us into savers. We look at how saving and investing could help you use that money wisely and set you up for a brighter financial future.

Ryan Kenny

16 Oct 2020 4 min read