Retirement is commonly seen as a time to chill out and benefit from the rewards of a lifetime of laborious work – however that doesn’t imply that the dreaded taxes disappear.
For pensioners, understanding how revenue tax applies in retirement is crucial to managing funds and avoiding surprises.
Whether or not you’re drawing a state pension, personal pension, or different types of retirement revenue, realizing what’s taxable will help you intend extra confidently.
We bought in contact with some specialists who’ve damaged down some key issues each pensioner must find out about revenue tax, so it’s one much less factor to fret about in your golden years.
What’s revenue tax?
“Revenue tax is a tax paid on most forms of revenue, out of your wage at work, income from a enterprise to curiosity you make on investments,” explains Liz Ritchie, head of tax at Forvis Mazars. “It applies to earnings from employment, self-employment, pensions, financial savings and investments. The quantity you pay is determined by how a lot you earn, with totally different revenue bands taxed at totally different charges.”
Who has to pay revenue tax?
“Presently, anybody who has an revenue of greater than £12,570 for the 2025/26 tax 12 months can pay revenue tax on the quantity they earn above the usual private allowance,” says Amy Knight, private finance and small enterprise professional at NerdWallet UK. “The speed at which you pay tax is determined by how a lot you earn.
“The essential price is 20%, charged on revenue as much as £50,270 per 12 months. Revenue tax is charged at 40% on earnings between £50,271 to £125,140 (often called the upper price). Should you earn greater than £125,140, you’ll pay the extra price of revenue tax on these earnings, which is at present 45%.”
Should you run your individual enterprise or have a aspect hustle that makes lower than £1,000, you don’t want to report this or pay tax on that little bit of additional cash you make.
“Nonetheless, as quickly as you cross the £1,000 mark, HMRC must find out about this further revenue, which will likely be factored into your tax calculations,” highlights Knight. “You report self-employed revenue by submitting a self-assessment tax return. The identical applies in the event you begin incomes rental revenue from property you personal.”
What forms of revenue are taxable for pensioners?
Tax on revenue you obtain from a pension is calculated in the identical manner as earnings from employment.
“Pensioners pay revenue tax as soon as their revenue exceeds the £12,750 restrict every year,” confirms Knight. “This contains cash from their state pension, any personal and office pensions, rental revenue if they’ve a second property, and curiosity earned on financial savings and investments above the non-public financial savings allowance.
“Individuals who select to run their very own enterprise after reaching state pension age will likely be taxed on the standard charges.”
Some state advantages are additionally taxable, that means pensioners might find yourself paying again a few of the monetary help they obtain from the federal government, Knight provides.
“For instance, bereavement allowance is taxable, so an older one who claims this profit might see some or all of it worn out if their revenue is above the tax-free allowance,” says Knight.
What widespread tax reliefs or allowances do pensioners typically overlook?
“Sure tax reliefs and allowances are sometimes ignored, corresponding to the power to take 25% of a personal pension freed from revenue tax [usually when you reach the age 55],” says Julia Rosenbloom, tax associate at regulation agency, Shakespeare Martineau.
You too can nonetheless obtain revenue tax aid in your pension contributions if you find yourself retired up till age 75, says Ritchie.
“That is as much as the quantity you earn or the annual allowance of £60,000,” says Ritchie. “In case you are a better or extra price tax payer, you can too declare extra tax aid by way of self evaluation and there are tens of millions typically left uncollected.”
Plus, when you have unused pension annual allowance for the earlier three tax years, this may be carried ahead to permit for extra contributions and tax aid, provides Ritchie.
“Nonetheless, when you have accessed your pension and began taking an revenue flexibly the foundations might be totally different,” explains Ritchie. “This normally triggers the Cash Buy Annual Allowance (MPAA) which sees the quantity you’ll be able to contribute to your pension and nonetheless obtain revenue tax aid restricted to £10,000.”
One other allowance that’s typically ignored is dividend allowance.
“£500 of revenue from dividends might be taken revenue tax-free in 2024/25,” says Ritchie.
