If you’re confused about paying tax in your golden years, here’s our expert guide to how you can avoid common pension pitfalls and even save money
Retirement is often seen as a time to relax and enjoy the rewards of a lifetime of hard work – but that doesn’t mean that the dreaded taxes disappear. For pensioners, understanding how income tax applies in retirement is essential to managing finances and avoiding surprises.
Whether you’re drawing a state pension, private pension, or other forms of retirement income, knowing what’s taxable can help you plan more confidently.
We got in touch with experts who have broken down key things every pensioner needs to know about income tax, so it’s one less thing to worry about in your golden years.
What is income tax?
“Income tax is a tax paid on most types of income, from your salary at work, profits from a business to interest you make on investments,” explains Liz Ritchie, head of tax at Forvis Mazars. “It applies to earnings from employment, self-employment, pensions, savings and investments. The amount you pay depends on how much you earn, with different income bands taxed at different rates.”
Who has to pay income tax?
“Currently, anyone who has an income of more than £12,570 for the 2025/26 tax year will pay income tax on the amount they earn above the standard personal allowance,” says Amy Knight, personal finance and small business expert at NerdWallet UK.
“The basic rate is 20%, charged on income up to £50,270 per year. Income tax is charged at 40% on earnings between £50,271 to £125,140. If you earn more than £125,140, you’ll pay the additional rate on those earnings, currently 45%.”
If you run your own business or have a side hustle that makes less than £1,000, you do not need to report this or pay tax on it. “However, as soon as you cross the £1,000 mark, HMRC needs to know about this extra income, which will be factored into your tax calculations,” says Knight.
“You report self-employed income by filing a self-assessment tax return. The same applies if you start earning rental income from property you own.”
Which incomes are taxable for pensioners?
Tax on income you receive from a pension is calculated in the same way as earnings from employment. “Pensioners pay income tax once their income exceeds the £12,750 limit each year,” confirms Knight.
“This includes money from their state pension, any private and workplace pensions, rental income if they have a second property, and interest earned on savings and investments above the personal savings allowance. People who choose to run their own business after reaching state pension age will be taxed at the usual rates.”
Some state benefits are also taxable, meaning pensioners may end up paying back some of the financial support they receive from the government, Knight adds. “For example, bereavement allowance is taxable, so an older person who claims this benefit could see some or all of it wiped out if their income is above the tax-free allowance.”
What tax reliefs or allowances are often overlooked?
“Certain tax reliefs and allowances are often overlooked, such as the ability to take 25% of a private pension free of income tax [usually when you reach 55],” says Julia Rosenbloom, tax partner at law firm Shakespeare Martineau.
You can also still receive income tax relief on your pension contributions when you are retired up until age 75, says Liz Ritchie. “This is up to the amount you earn or the annual allowance of £60,000. If you are a higher or additional rate taxpayer, you can also claim additional tax relief through self assessment and there are millions left uncollected.”
If you have unused pension annual allowance for the previous three tax years, this can be carried forward to allow for additional contributions and tax relief, adds Ritchie.
“However, if you have accessed your pension and started taking an income flexibly the rules can be different,” explains Ritchie. “This usually triggers the Money Purchase Annual Allowance, which sees the amount you can contribute to your pension and still receive income tax relief limited to £10,000.”
And Ritchie adds: “£500 of income from dividends can be taken income tax-free in 2024/25.”
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