Tax on pension income — what retirees often get wrong.
The UK tax system doesn't treat pension income differently from employment income. Every pound of pension withdrawal, state pension, and other earnings combines into one taxable total — and the interactions catch people out.
- ▸All pension income — state pension, workplace pension, SIPP drawdown — is combined with other income and taxed at the individual's marginal rate.
- ▸The personal allowance (£12,570) is tapered by £1 for every £2 of income above £100,000, creating an effective 60% marginal rate between £100,000 and £125,140.
- ▸The state pension uses up most of the personal allowance first, meaning almost every pound of private pension income is taxable from the start.
- ▸Marriage allowance can transfer £1,260 of unused personal allowance to a spouse, saving up to £252 per year.
All your income sources combine
Income tax in retirement works the same way as income tax during working life. There is no special pension tax rate, no retirement discount, and no exemption for being over state pension age (except for National Insurance, which stops at state pension age).
Every source of income stacks together:
- State pension
- Workplace or personal pension (drawdown withdrawals, annuity payments)
- Employment or self-employment income
- Rental income
- Savings interest (above the savings allowance)
- Dividend income (above the dividend allowance)
The combined total determines which tax band applies. The bands for 2025/26 are:
| Band | Income range | Rate |
|---|---|---|
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
A retiree receiving £11,502 from the state pension, £25,000 from a workplace pension, and £8,000 in rental income has total income of £44,502. Tax is due on £44,502 − £12,570 = £31,932 at 20% = £6,386.40.
The income tax retirement calculator models the tax across multiple income sources.
The personal allowance taper above £100,000
For retirees with total income above £100,000 — which can happen in a single year through a large pension withdrawal, even if ongoing income is lower — the personal allowance is progressively withdrawn.
The taper removes £1 of personal allowance for every £2 of income above £100,000. At £125,140, the personal allowance is completely gone.
This creates an effective marginal tax rate of 60% in the £100,000–£125,140 band. Every additional £2 of income in this range reduces the allowance by £1 (losing 20% of that £1 in tax relief) while also being taxed at 40%. The combined effect: 40% + 20% = 60% on each additional pound.
Example: a retiree withdraws £110,000 from a pension in a single tax year (the taxable portion after 25% tax-free). Their personal allowance is reduced by (£110,000 − £100,000) ÷ 2 = £5,000, leaving only £7,570 tax-free instead of £12,570. The lost allowance costs an extra £1,000 in tax (£5,000 × 20%).
This taper is the single most common source of unexpectedly high tax bills in retirement. A large one-off withdrawal to fund a home improvement or buy a car can inadvertently trigger it.
The pension lump sum tax calculator accounts for the personal allowance taper when estimating the tax on large withdrawals.
State pension using your allowance first
The state pension is taxable income but is paid gross — no tax is deducted at source. HMRC effectively treats it as the first income against the personal allowance.
The full new state pension for 2025/26 is £11,502.40. Against a personal allowance of £12,570, this leaves just £1,067.60 of tax-free allowance for all other income.
In practical terms, this means almost every pound of private pension drawdown, workplace pension, or other income is taxable from the first pound. A retiree taking £20,000 from a SIPP on top of the full state pension pays tax on approximately £18,932 of it.
For retirees receiving less than the full state pension — perhaps due to gaps in their National Insurance record — the remaining allowance is proportionally larger. But the principle holds: the state pension occupies the allowance first, and other income fills whatever is left.
Marriage allowance in retirement
The marriage allowance permits a spouse or civil partner who earns less than the personal allowance to transfer £1,260 of their unused allowance to the other partner. The recipient's tax bill reduces by up to £252 per year (£1,260 × 20%).
In retirement, this is relevant when one partner has income below £12,570 (and therefore has unused personal allowance) while the other is a basic-rate taxpayer. The transfer only benefits couples where the higher-earning partner pays basic-rate tax — it provides no benefit if the recipient is a higher-rate taxpayer.
A common retirement scenario: one partner receives only the state pension (£11,502.40, below the personal allowance), while the other receives the state pension plus a private pension, taking their total above £12,570. The lower-earning partner can transfer £1,260 of their unused £1,067.60... but since only £1,067.60 is unused, only that amount can be transferred. The saving is £1,067.60 × 20% = £213.52.
Marriage allowance must be claimed — it doesn't apply automatically. Claims can be made on gov.uk and backdated up to four tax years.
Making it work: the sequencing strategy
The order in which income is drawn in retirement affects the total tax paid over time. This isn't about avoidance — it's about using allowances and tax bands efficiently across years rather than wasting them.
Key principles:
Use the personal allowance every year. If total income in a given year is below £12,570, some of the tax-free allowance goes unused. Unlike the annual allowance for pension contributions, the personal allowance cannot be carried forward. Drawing enough pension income each year to use it fully — but not so much as to hit higher-rate bands unnecessarily — is the core of tax-efficient sequencing.
Avoid the £100,000–£125,140 trap. Where possible, keep any single year's total income below £100,000 to preserve the full personal allowance. A £120,000 withdrawal in one year is taxed more heavily than two £60,000 withdrawals in consecutive years.
Consider ISAs first. ISA withdrawals are not taxable income. Drawing from ISAs in years when pension withdrawals would push income into higher bands — and saving pension withdrawals for years with lower other income — can reduce the lifetime tax bill.
State pension timing matters. Deferring the state pension increases the payment by 1% for every nine weeks of deferral. But the decision interacts with income tax: a higher state pension means less personal allowance for other income. The deferral is not always beneficial once tax is factored in.
- ▸The personal allowance of £12,570 is reduced by £1 for every £2 of income above £100,000, creating an effective 60% marginal tax rate in the £100,000–£125,140 range. [gov.uk]
- ▸Marriage allowance allows a transfer of £1,260 of personal allowance to a spouse, reducing the recipient's tax by up to £252 per year. [gov.uk]
- ▸The full new state pension for 2025/26 is £11,502.40 per year, consuming 91.5% of the personal allowance. [gov.uk]
This is factual information, not financial advice. If you're unsure what's right for your situation, speak to an FCA-regulated financial adviser.