Your Income Tax bill could rise in retirement. Here’s what you should know

If you’re on the runway to retirement, assessing how your Income Tax bill might rise is an important step to take. Find out all you need to know here.

One essential aspect of retirement that you may be unknowingly unprepared for is the amount of tax you’ll pay, particularly Income Tax.

Although you’ve likely paid Income Tax throughout your career, the amount you pay could change in retirement – particularly when faced with today’s retirement tax traps (more on these later).

Indeed, a report from FTAdviser reveals that the number of retirees paying Income Tax has risen by approximately 10%. What’s more, 55% more people are set to pay additional-rate tax in the 2023/24 financial year.

Keep reading to find out how your Income Tax liability could shift once you retire, as well as three current tax traps to be aware of.

Having multiple income streams could push you into a higher tax bracket in retirement

One core shift you are likely to experience when you reach retirement is a change to how you receive your income.

While you may have once earned a single salary, or even received a steady stream of income as a self-employed earner, you may now be drawing income from a number of different sources at once.

For instance, in any given tax year, you could take your income from some or all of the following:

· The State Pension, which is set to rise to more than £11,500 a year if the “triple lock” is implemented as planned in April 2024

· Your defined contribution (DC) pension pot

· Any defined benefit (DB) pension schemes you are part of, also known as “final salary” pensions, which could pay a steady income in retirement

· Investments you’ve decided to cash in

· Any rental properties you own.

Each of these has their own set of rules when it comes to tax.

Aside from non-ISA investments you cash in upon retirement, which could be liable for Capital Gains Tax (CGT), all the income sources in the above list could attract Income Tax. As such, keeping track of how much you’re earning throughout each tax year may require more organisation than you’re used to.

Resting on your laurels in this area could mean that your retirement income moves into a higher tax bracket than you’d planned. While the cost of living is high and retirement proves increasingly expensive, this may not be welcome news.

Although useful, having multiple income streams is not the only retirement tax trap to be aware of before you stop working. There are a number of ways that your pension, in particular, could attract a higher Income Tax liability than you expect.

Here are three pension-related tax traps to avoid in retirement.

3 pension tax traps that could increase your Income Tax bill

1. Drawing your entire defined contribution pension as a lump sum

As you may know, 25% of your DC pension can be taken tax-free. The remaining 75% is taxed at your marginal rate of Income Tax.

If you decided to take your pension as a lump sum, you could pay more Income Tax than necessary on the money you’ve saved up.

Indeed, if your pension is large, and you drew it all at once upon retirement, this could leave hundreds of thousands of pounds vulnerable to an additional-rate (45%) tax bill.

As such, it could be prudent to discuss a withdrawal plan with your Kellands financial planner before you take your pension. We can help you avoid easy-to-overlook pension tax traps by creating a robust retirement plan in plenty of time before you stop working.

2. The removal of the Lifetime Allowance tax charge

In April 2023, the chancellor announced the removal of the Lifetime Allowance (LTA) tax charge, giving high earners a golden opportunity to save even more into their pensions tax-efficiently.

The LTA previously stood at £1,073,100, and marked how much pension wealth a person could amass over the course of their lifetime without paying an additional tax penalty when they withdrew their funds. Now, the LTA tax charge will no longer be applied to large pension pots.

You might be thinking: “If the LTA tax charge removal helps me pay less tax, why does this move count as a tax trap?”

While you may now be able to build up a very large pension pot without the concern of an extra tax penalty being applied later, having more pension wealth could mean you draw more from it each year in retirement.

Having built up more wealth within your personal pension pot, you could become “trigger happy” about taking funds out of it in retirement – and may pay a higher rate of Income Tax as a result.

This is where forward planning could make all the difference. Using cashflow modelling, a financial planner can assess how much you can afford to take from your pension each year for a sustainable retirement lifestyle. Plus, we can tie this in with tax planning, helping to ensure your Income Tax bill is mitigated where possible.

3. The Money Purchase Annual Allowance

Finally, an overlooked pension tax trap to be conscious of as you approach retirement is the Money Purchase Annual Allowance (MPAA).

The MPAA is triggered when a person begins to access their pension flexibly. When this happens, your Annual Allowance (standing at £60,000 for most earners in 2023/24) reduces to just £10,000. The Annual Allowance marks how much you can invest into a pension each year while receiving tax relief on your payments.

If you plan to keep contributing to your pension while you’re retired – perhaps using income from properties or dividends to do so, for example – you can only pay £10,000 a year into your pension while receiving tax relief. It’s important to note here that you need to receive £10,000 in minimum pensionable earnings to receive tax relief once you’re retired; pensionable earnings do not include dividends or rental income.

Ultimately, factoring the MPAA into your reinvestment plans could ensure you make the most of your allowances, while simultaneously avoiding tax-inefficient investments where appropriate.

Get in touch to learn more about planning a tax-efficient retirement

If you’d like to calculate how much Income Tax you could be set to pay in retirement, your Kellands financial planner can provide invaluable guidance. We can combine our years of experience with the latest financial technology to help you fund your dream retirement.

Email us at, or call 0161 929 8838.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investment 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.

< back to News & Views

News & Views

May 23, 2024

How could stealth taxes affect your wealth in 2024?

In the past four years, many aspects of your financial life may have changed.
Read more