Income Tax for retirees: Why it’s rising and what you can do
A new study reveals that over-70s now pay more Income Tax than under-30s. Here’s why Income Tax is rising for retirees and what you can do about it.
As we get older, many of us assume that our financial situation will become simpler. If you have accumulated plenty of wealth in your life, you may not look too closely at how it might be eroded by tax in your later years.
Yet according to a press release from HMRC, published by Sky News, data from the 2022/23 financial year revealed that over-70s collectively paid more Income Tax than under-30s.
Over-70s paid £19.1 billion in Income Tax in 2022/23, whereas under-30s paid £18.3 billion.
Of course, if you plan to draw from your private pension and investments to supplement your lifestyle in retirement (or are already doing so) you will likely have already paid Income Tax when you earned the money in the first place. As such, many retirees are paying a “double tax”, which could deplete a pot of wealth faster than expected.
Keep reading to discover why retirees may be subject to more Income Tax than young earners, and some tax mitigation strategies you could consider early in your retirement.
Income Tax thresholds are frozen until 2028
Income Tax is normally payable on:
- Earnings from employment
- Taxable pension income
- The State Pension
- Certain interest payments from savings and investments
- Some forms of trust income.
Those who earn £100,000 a year or less have a Personal Allowance – the amount under which earners don’t pay Income Tax – of £12,570. For every £1 earned over £100,000, your Personal Allowance will taper by £2, meaning it disappears completely at £125,140.
Above the Personal Allowance, income from the above sources are normally subject to your marginal rate of Income Tax. In 2025/26, and frozen until 2028, these are as follows.
| Band | Taxable income | Tax rate |
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
If you’re a retiree drawing income from several sources, or are approaching retirement and want to be prepared, you could still be unaware of how much Income Tax you’ll incur once you stop working.
On the other hand, young earners are typically receiving a lower income, and it may be more common for this to only come from one source, helping them to keep track of what they earn more easily.
Remember, with the exception of your tax-free cash, your pension withdrawals are subject to Income Tax. Combine this with the State Pension, income from properties, or any part-time earnings you have, and you might find that your tax bill is higher than you imagine.
As an example, imagine that you have recently retired at age 60 and took all your tax-free cash as a lump sum.
From now on, you wish to draw approximately £80,000 a year from various income sources. £20,000 comes from your ISAs tax-free, leaving £60,000 to be drawn from your private pension and the State Pension. Subtracting your Personal Allowance, your taxable income would be £47,430.
4 Income Tax mitigation strategies for retirees
By thinking carefully about tax as soon as you retire (or preferably beforehand), you could avoid being one of the over-70s who ends up paying more Income Tax than the under-30s.
Here are four mitigation strategies to consider if you’re pre-retirement or recently retired.
- Plan out how you’ll take your tax-free cash, if you haven’t already taken it
Most pension holders with defined contribution (DC) pensions can withdraw 25% of the pot without any tax being due. Usually, you can access this money once you turn 55.
Read more: The 3 main types of UK pension, explained
The maximum tax-free cash you can withdraw is £286,275, as of the 2025/26 tax year, or 25% of your uncrystallised pension fund, depending on how much your pension is worth.
You can either take this all at once, or gradually over a longer period of time. The best route for you will depend on the other types of income you expect to receive at the same time. If you pass away at or over 75, and still have tax-free cash to take, your beneficiaries may pay Income Tax on their withdrawals.
In any case, planning out how you’ll take your tax-free cash may help you mitigate the Income Tax you pay throughout retirement.
- Diversify your retirement income
Not all forms of retirement income will incur Income Tax.
For example:
- Any wealth you draw from Individual Savings Accounts (ISAs) aren’t subject to tax.
- Liquidating business shares, or any investments outside of an ISA, may incur Capital Gains Tax (CGT). For some people, the rate of CGT you pay will be lower than your marginal rate of Income Tax.
- Receiving dividends as part of your income may incur Dividend Tax, the rates of which can be lower than Income Tax.
So, if you diversify your income – draw smaller amounts from different sources, rather than a large amount from one taxable source – your overall tax bill could decrease.
- Use cashflow modelling to factor tax into your retirement plan
Cashflow modelling is a professional form of software that enables you to factor in elements that could erode your retirement fund over the years.
From inflation to tax, this programme may be able to identify ways for you to reduce the tax you pay while planning ahead for the expenses – including tax bills – you can’t avoid.
- Work with a professional
Anticipating how much tax you might pay and drawing up a retirement plan by yourself is no mean feat. It takes time, foresight, and is usually best aided by professional tools like financial planning.
When you work with us here at Kellands, we will assess your tax situation and offer solutions to reduce your burden where possible. Then, we will continue to check in with you annually, making adjustments if your income, life circumstances, or tax liabilities change.
Work with us to secure a retirement plan you can rely on
Want to retire with confidence and peace of mind?
Email us at hale@kelland.co.uk, or call 0161 929 8838.
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.
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.
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 cashflow planning, tax planning, or trusts.