Tax and retirement

You pay tax if your total annual income adds up to more than your personal allowance. Find out about your personal allowance and income tax rates.

Your total income could include:

• The state pension you get (either the basic state pension or the new state pension)
• Additional state pension
• A private pension (workplace or personal) - you can take some of this tax-free
• Earnings from employment or self-employment
• Any taxable state benefits you get
• Any other income, such as money from investments, property or savings

You may have to pay income tax at a higher rate if you take a lump sum from a private pension. You may also owe extra tax at the end of the tax year.

Yes. Your state pension counts towards your taxable income, but it will be paid to you gross (before any tax is deducted).

If your total income from all sources, including the state pension, is greater than your tax-free personal allowance (£12,570 for 2024/25 tax year), tax on your state pension is due and this will normally be deducted from any private pension or earnings you might have, which are paid through the PAYE system.  However, if you have no PAYE income, you'll have to complete a self-assessment tax return and pay any tax due directly to HMRC.

Find out more about your state pension.

Yes. Income from pensions is taxed like any other kind of earned income. You have a personal allowance (£12,570 for 2024/25 tax year) whereby you will pay no income tax, and then you pay 20% income tax on everything from £12,571 to £50,270. Anything above £50,270 will incur a higher rate of tax. 

Pensioners do not receive a higher personal allowance than other age groups. The amount you can earn tax-free before you start paying income tax is £12,570 for 2024/25. You will pay basic rate tax (20%) on taxable earnings between £12,571 and £50,270. This means you can earn up to £50,270 before you start paying higher rate tax.

If you are married or in a registered civil partnership and you and/ or your spouse or civil partner were born before 6 April 1935, you can also claim a married couple’s allowance (MCA). Further information can be found at MoneyHelper.

If you have any further questions around how tax could affect your retirement. You can find additional support at MoneyHelper.

You may have other sources of income which you will need to consider when you’re approaching retirement. Here are a few of those which are worth considering:

• Savings and investments

More people are using any savings and investments they have to boost their income. These are also taxable, with some exceptions.

• ISAs

Some products such as ISAs are tax exempt, so you won’t pay tax on any income or gains you receive.

• Personal Savings and Dividend allowances

You may also have an annual personal savings allowance and an annual dividend allowance. These allowances can provide further tax-free income each year.

• Become a landlord

There is also a scheme that allows you to rent a room in your home and receive a tax-free income each year up to a set limit.

• Your property

If you downsize or use an equity release product the proceeds are generally tax-free. This depends on whether the property is your main residence, and there may be tax liabilities if you use part of your home as a business or rent it out.

Further guidance is available at MoneyHelper.