One of the key announcements from the government’s Autumn Budget was that Income Tax thresholds will remain frozen until at least 2031. This means the State Pension is on course to meet, and potentially exceed, the Personal Allowance.
For many people, the State Pension makes up a large part of their retirement income. As it rises, understanding how tax works in retirement becomes more important.
The Personal Allowance, which is how much you can earn annually before paying Income Tax, has been frozen at £12,570 since 2021. In 2021/22, the full new State Pension was £9,339.20 per year. Today, it’s £11,973 per year (2025/26).
The State Pension increases each year under the triple lock. This guarantees a rise based on whichever is highest of:
- inflation;
- average wage growth; and
- 2.5%.
Even if the State Pension only rises by the minimum 2.5% each year, it’s expected to exceed the Personal Allowance by April 2027.
Who will this affect?
Chancellor Rachel Reeves said she doesn’t intend for people to pay Income Tax if their only income is the State Pension. However, this would apply to a relatively small number of people.
In reality, many people have other sources of income in retirement, such as:
- a workplace or private pension;
- a part-time job;
- interest on savings; and
- investments.
As the State Pension gets closer to the Personal Allowance, even a small amount of extra income could mean you start paying Income Tax.
From April 2026, the full new State Pension is expected to be £12,548. If you’re eligible for the full amount, you’d only need £32 a year of extra income to become a basic rate taxpayer.
There are around 13 million people receiving the State Pension across the UK. The Department for Work and Pensions (DWP) estimates that 8.51 million already pay Income Tax. This includes around 2.5 million people on the pre-2016 State Pension system, who receive both a basic pension and additional State Second Pension (SERPS) income, which can take their total income over the tax threshold.
With the Personal Allowance frozen, millions more people could start paying Income Tax in the years ahead.
How do you pay tax in retirement?
If your total income goes above the Personal Allowance, you pay Income Tax on the amount above it. How that tax is collected depends on where your income comes from.
If your State Pension on its own takes you over the Personal Allowance, HMRC will usually collect any Income Tax through a Simple Assessment after the tax year has ended. This sets out how much tax you owe and when it needs to be paid.
The Chancellor said that people whose only income is the State Pension shouldn’t pay Income Tax in future. However, the government hasn’t yet confirmed how this would work in practice.
If you receive income from a workplace or private pension, Income Tax is usually deducted automatically by your pension provider under PAYE (Pay As You Earn). This is done through your tax code, which is why it’s important to check your tax code is correct.
If you receive income from other sources and also have PAYE income, HMRC will usually collect all the tax you owe through your tax code.
You will usually need to complete a Self-Assessment tax return if you have:
- self-employed income; or
- total income exceeding £150,000 a year.
How can I reduce my tax bill in retirement?
There are a few general ways to manage your income in retirement that may help reduce how much tax you pay:
- understanding how much State Pension you’re likely to receive;
- making use of tax-free income sources;
- pacing your pension withdrawals once you can access your pension (normally from age 55, rising to 57 from 2028); and
- using your ISA allowance where possible.
Check your State Pension
A good starting point is to get a State Pension forecast on GOV.UK. This shows how many years of National Insurance (NI) contributions you have made and how much State Pension you’re on track to receive.
You usually need 35 qualifying years of NI contributions to receive the full new State Pension.
Look at other income
It can also help to review your other sources of income, such as workplace and private pensions, savings, investments, or part-time work.
Many people have higher income in the early years of retirement, especially if they’re still working or using savings. This can often be a useful time to draw on tax-free income sources.
Use your tax-free pension lump sum
One option is to take small, regular amounts from your tax-free pension lump sum.
You can usually access your pension from age 55, rising to 57 from 2028. Most people can take up to 25% of their pension savings tax-free.
For example, if you have £500,000 in pension savings, you could access up to £125,000 tax-free - either as a lump sum or in portions. Using our Drawdown Calculator can help you understand how much you could take tax-free and how much tax might apply to further withdrawals.
Make the most of ISAs
Any income you receive from ISAs is tax-free. This includes:
- interest;
- dividends; and
- investment gains.
Using ISA savings to top up your income can reduce the amount of taxable income you need to take from your pensions. If you aren’t using your full £20,000 annual ISA allowance (2025/26), you may wish to consider doing so, depending on your circumstances.
The bottom line
Whether you’re in, or approaching, retirement, it’s worth keeping an eye on the impact of the rising State Pension. While frozen tax thresholds may mean more people pay Income Tax over time, planning ahead can help you manage your income more effectively.
Understanding how much State Pension you’re likely to receive is a good first step. Pacing withdrawals and making use of tax-free income sources can also help you keep more of your money over the long term.
Want to explore how your pension could grow? Pensionbee’s Pension Calculator can help you see how adjusting contributions could impact your retirement income.
Ruth Jackson-Kirby is a Financial Journalist passionate about making money matters clear and accessible. She’s written for The Mail on Sunday, MoneyWeek, The Sun, and Good Housekeeping, helping readers navigate pensions and personal finance with confidence. She believes everyone deserves financial security and is on a mission to cut through jargon and make finance relatable.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
