From MoneyWeek · · 3m
The retirement tax trap nobody planned for
Frozen thresholds are quietly pulling over a million pensioners into 40% tax and beyond, and there are ways out.
In brief
Frozen thresholds are quietly pulling over a million pensioners into 40% tax and beyond, and there are ways out. Frozen thresholds mean retirement income, savings interest and estates are all being taxed harder, so time your withdrawals and use every allowance you have. Originally reported by MoneyWeek.
Retirement, then the tax bill
Turning 65 is meant to be the start of winding down. For millions it now starts a run of income tax, savings tax and capital gains tax headaches.
Three million more taxpayers
The number of over-65s paying income tax has risen by more than three million in five years, according to HMRC figures.
Frozen since April 2024
The personal allowance is stuck at £12,570 and the higher rate band at £50,270. The additional rate threshold was cut to £125,140 back in April 2023.
Fiscal drag does the work
Pensions rise, thresholds don't, so pensioners drift into higher bands without earning a penny more in real terms. Steve Webb's FOI request put numbers on it.
A million at 40% or more
Pensioners aged 66-plus paying 40% or 45% tax has more than doubled, from 494,000 in 2021/22 to 1,092,000. Those on 45% almost tripled, to 115,000.
“But this is the norm now for over a million pensioners, with the number set to rise further.”
Frozen until 2031
Thresholds stay put for another five years, so those numbers keep climbing. People who expected to be basic rate taxpayers in retirement are finding out otherwise.
“Many people of working age may have expected that they would be basic rate taxpayers in retirement.”
Split your withdrawals
Timing matters. Break one large pension withdrawal into two and spread it across two tax years to keep taxable income below the next band in each.
Keep paying into a pension
Tax relief on contributions runs to age 75, cutting taxable income in years you would otherwise pay higher rate. Watch the money purchase annual allowance, which caps relief at £10,000 gross once you've taken taxable cash.
“For those who have income to spare in retirement, additional pension saving can be worth considering.”
Over-65s dominate CGT
Of the 551,000 people who paid capital gains tax in 2024/25, 212,000 were 65 or older. That's 38% of the total.
Why wealth peaks at 65
Sarah Coles of AJ Bell says people build assets through working life, then start spending them down. Selling at that turning point is what triggers the gains.
“Wealth peaks around the age of 65, and at that point they start spending their way through their wealth.”
Drip-feed your gains
Hold assets in ISAs or pensions where gains escape CGT. Use the £3,000 annual exempt amount every year to sell down bit by bit, and move assets to a spouse who hasn't used theirs.
Savings tax quadruples
Over-65s paying tax on savings interest is forecast to hit 2.1 million in 2026/27, up from 517,000 in 2022/23. Their combined bill goes from £795 million to £3.34 billion.
The over-65 ISA advantage
From April 2027 the cash ISA limit drops to £12,000, but not for the over-65s. They keep the full £20,000, says Paragon's Andrew Wright. Spare cash can also clear a mortgage or credit card.
“Those aged 65 plus have the benefit of retaining the full £20,000 cash ISA allowance from next tax year.”
Gift early, gift often
IHT receipts hit £3.2 billion in three months, and unused pensions join estates from April 2027. Use the £3,000 annual exemption, give regularly out of income, and start the seven-year clock now.
“The earlier gifting is done the better as that gives the seven year rule more time to expire.”
The headline
Frozen thresholds mean retirement income, savings interest and estates are all being taxed harder, so time your withdrawals and use every allowance you have.
