MILLIONS of state pensioners are set to pay a “retirement tax” for the first time – but there are tricks you can use to try and avoid it.
Over nine million over 66’s are predicted to pay tax on their earnings from April 2026 due to frozen tax thresholds and a rising state pension.
Forecasts by Deutsche Bank predict the triple lock will rise by 5.5% in April 2026.
The triple lock ensures the state pension goes up by whatever is highest out of inflation, 2.5% or wages.
The bank is forecasting average weekly earnings will reach 5.5% in July, higher than predicted inflation for September and 2.5%.
The 5.5% hike will see those on a full new state pension breach the personal allowance (£12,570) for the first time in 2026.
It means those relying on solely the full new state pension for income will have to pay tax of around £12.
But it will also see just over nine million pensioners who have other sources of income on top of the state pension having to pay some form of income tax.
This is because you are also taxed on income outside of your state pension, including any that comes from a job or private pension.
Luckily, if you are expecting to be dragged into paying income tax on your state pension over the coming years, or do already, there are some tricks you can use to lessen the blow and reduce your overall tax burden, according to experts.
Laura Suter, director of personal finance at AJ Bell, and Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, offered their tips.
ISA ISA baby
An individual savings account (ISA) is a type of savings account in which you can save up to £20,00 each year tax-free.
[bc_video account_id=”5067014667001″ application_id=”” aspect_ratio=”16:9″ autoplay=”” caption=”How to track down lost pensions worth £1,000s” embed=”in-page” experience_id=”” height=”100%” language_detection=”” max_height=”360px” max_width=”640px” min_width=”0px” mute=”” padding_top=”56%” picture_in_picture=”” player_id=”default” playlist_id=”” playsinline=”” sizing=”responsive” video_id=”6351034419112″ video_ids=”” width=”640px”]But is not just the interest you earn on them that is tax-free, but any withdrawals too.
Laura explained using an example of someone withdrawing 4% a year from a £100,000 ISA pot.
This would amount to £4,000 income each year earned tax-free compared to taking it out of a regular savings account which is subject to tax.
Laura said: “Pensioners looking to reduce their tax bill need to think about how they can maximise their tax-free income.
“For example, any withdrawals made from their ISAs will be free of any tax, so they can use that pot of money to boost their income without impacting their tax bill.”
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It’s tempting to take out your whole private or workplace pension when you reach retirement and put it into a savings account.
But do this and you’ll end up paying income tax on any sitting in taxable accounts.
Instead, you can actually take out 25% of the value of the pension tax-free.
You can either do this as a lump sum or in smaller gradual amounts to top up your state pension without being taxed on it.
Laura said: “You can take ad-hoc amounts or regular withdrawals from the pot to use your tax-free amount gradually.
“This is a great way of boosting your income but not increasing your tax bill.”
Marriage Allowance
If you are married or in a civil partnership you might be able to reduce the amount of tax you pay overall via the Marriage Allowance.
It lets you transfer some of your personal allowance to a spouse if you are a non-tax payer and they are a basic rate taxpayer.
Marriage Allowance for this current tax year is worth £252
Helen Morrissey, from Hargreaves Lansdown, said: “The non-taxpaying partner can transfer £1,260 of their Personal Allowance to their partner.
“This reduces their own personal allowance so it might mean they end up paying some tax but the boost to the taxpaying spouse means you pay less tax overall as a couple.”