There are six strategies to lower your retirement tax burden and avoid the pensioner tax trap

Since income tax thresholds are still frozen, you might end up giving the tax collector more money even though the full new state pension increased by £470 annually starting in April

We look for ways to lower your expenses.

According to triple lock regulations, the state pension increased by 4 percent this April, raising the annual amount for those who receive the full new state pension to 11,973. The tax-free personal allowance of £12,570 is just a short distance away.

As other income sources push them over the threshold, more and more pensioners are now required to pay taxes in retirement. In the future, the effects of fiscal drag will only exacerbate this further.

Due to decisions made by the previous Conservative government, thresholds will not be reviewed until 2027 - 2028, even though chancellor Rachel Reeves did not extend the freeze in her 2024 Autumn Budget.

Additionally, since the government's finances are being strained by slow growth and high borrowing costs, Reeves may be compelled to review this policy, ultimately prolonging the threshold freeze.

According to the most recent HMRC data, there are currently approximately 81.5 million pensioners who pay income tax. An additional 11.6 million pensioners are expected to pay income tax by 2027 - 2028, according to research from the House of Commons Library.

In one year, at the beginning of the 2026 - 2027 tax year, the state pension itself might be only 15p short of the personal allowance, according to analysis from wealth management firm Quilter.

"The most recent projections from the OBR confirm that a strange tax cliff edge for pensioners is rapidly approaching. According to Jon Greer, head of retirement policy at Quilters, the state pension is expected to increase by 4 0.6 percent in April 2026 under the triple lock, coming in just below the frozen personal allowance.

"That means that in the UK, pensioners may have to return a portion of their state pension to the exchequer in taxes in just a year, which many would find absurd.

In the event that the government steps in, pensioners hope that the tax thresholdsrather than the generous triple lock policywill be examined. Meanwhile, here are six suggestions to lower your retirement tax liability.

1. Take out your pension's tax-free amount in installments

You can access up to 25% of your pension pot tax-free when you first retire. Although you can withdraw it in multiple installments, many people choose to take it out as a one-time lump sum.

You can continue to profit from investment growth by keeping the majority of the money invested. After that, 25% of your withdrawals are tax-free each time. If your pension fund keeps increasing in value, the tax-free part of it will also keep growing.

As a result, it is frequently more tax-efficient to withdraw your tax-free money in installments.

2. Pay attention to emergency tax codes

When many savers access the taxable part of their pension pot for the first time, they will be subject to an emergency tax code. They must therefore request a tax refund because they were overcharged.

This is because HMRC taxes the first flexible withdrawal on a "Month 1" basis. This implies that for the remainder of the tax year, the withdrawal is taxed as though it were the retiree's monthly income.

Hargreaves Lansdown's head of retirement analysis, Helen Morrissey, says, "You can reclaim the overpaid tax, but it's easier to reduce this issue by making sure your first withdrawal is a small one."

3. Take advantage of all of your tax-free benefits

You won't be required to pay income tax if your state and private pensions, along with any other taxable income, don't already exceed the 12,570 threshold. Even so, you are still eligible for a number of tax-free benefits each year even if you do exceed this cap. These consist of:

Personal savings allowance: For balances held outside of an ISA, basic-rate taxpayers are eligible to receive up to £1,000 in tax-free savings interest annually. All assets held in an ISA are exempt from taxes. The personal savings allowance for higher-rate taxpayers decreases to £500 annually, and for additional-rate taxpayers, it vanishes completely. Starting rate: If your retirement income is less than 17,570 per year, you may be eligible to receive up to 5,000 in tax-free savings interest annually in addition to the personal savings allowance. The entire amount is due to those who make £12,570 or less. For every pound over the personal allowance, individuals who make between 12,570 and 17,570 will forfeit one of the starting rates. Income from investments: Before taxes are due, you can receive up to £500 in dividends (2025/26 allowance). This also holds true for dividends that are not received in an ISA wrapper. All earnings made within an ISA are exempt from taxes. Capital gains: Before taxes are due, you may realize up to £3,000 in capital gains (2025/26 allowance). Once more, any gains made inside an ISA wrapper, no matter how much, will be tax-free. Utilizing as many of these deductions as possible will lower your overall tax liability.

4. Pay attention to tax thresholds and take out only what you require

In order to move into a lower tax bracket, it might be worthwhile to slightly reduce your pension withdrawals if they put you in a higher one. This may enable you to keep valuable allowances like the personal savings allowance in addition to lowering the tax you pay on any earnings that surpass the threshold.

Another benefit of leaving money invested in your pension is that, historically, i.e. E. Pensions were immunity from inheritance tax, so you could only take out as much as you truly needed to live comfortably. However, a policy announced in the Autumn Budget calls for changes to these regulations starting in April 2027.

Given that anyone who inherits a pension after this date runs the risk of receiving a double tax bill (income tax and inheritance tax), the IHT rule change may have an effect on how some pensioners manage their retirement funds moving forward. In a different article, "Pensions face double tax due to inheritance tax change what are your options" we provide more information.

Gary Smith, a financial planning partner at wealth management company Evelyn Partners, stated, "We would always advise clients to consider the income tax they will pay when planning pension withdrawals, but this question is becoming more important now that more savers are looking to take greater amounts out, in light of the IHT measure in the Budget."

He continues, saying: "Those who are now aiming to spend or give more of their pension funds should be mindful of the tax they will pay when they take money out, as that is a fixed liability that they will have to pay, while in some cases the IHT may only be a hypothetical future issue.

In order to avoid pushing their total yearly income over £50,270 into higher-rate tax at 40%, many people may need to measure their pension withdrawals. "If at all possible, it can make sense to keep one's taxable income on the right side of the next tax band."

The 125,140 additional-rate boundary may be the upper limit for wealthier savers, but retirees, like employees, also face an effective marginal income tax rate of 60% above £100,000 in income since that is when the personal allowance begins to be deducted.

5. As a couple, make plans

Tax benefits come with being married or in a civil partnership. In order to lower your combined tax burden in retirement, it is worthwhile to plan as a couple.

A couple can utilize their 12,570 personal allowance if they divide their income needs equally, according to Morrissey. "To maximize any capital gains tax or dividend tax allowances, you can also divide assets amongst yourselves," she continues.

6. Continue making pension contributions after you leave retirement

Due to rising living expenses and inadequate pension funds, 14% of retirees over 55 have returned to work, according to research released by Standard Life in 2024.

If this is you, you may be tempted to stop making pension contributions and instead use your job salary to pay for your current style of living. To make it easier to access later, you might be tempted to hide it in a cash ISA or savings account.

It might be worthwhile to keep making pension contributions, though, as this will enable you to take advantage of employer and pension tax relief and possibly lower your income tax liability.

"You can still contribute to your pension even if you have already accessed it, and it may reduce the income tax you pay," says Charlene Young, an AJ Bell pensions and savings specialist.

Additionally, if you have already received income from a private pension, you will probably have a lower annual income cap. The Money Purchase Annual Allowance, as it is commonly called, is typically £10,000 annually.

But if you're under 75 and don't go over that, you might be able to lower your tax bracket by lowering your taxable income by contributing to your pension.