Navigating retirement taxes: a beginner's guide

Taxes can eat into your hard-earned retirement savings and affect your financial flexibility. So, whether you’re approaching retirement or already enjoying it, it’s good to be aware of the tax implications of your income.

In this post, we’ve taken a good look at retirement taxes in the UK, including what they are and what you can do to ease your tax burden. Take home more, worry less, enjoy life.

Types of retirement taxes in the UK

There are several types of taxes that you may be subject to in retirement, including:

Income Tax

You’ll need to pay Income Tax on any income you enjoy in retirement over your Personal Allowance – whether that’s from a state or private pension, property, or other investments.

How Income Tax works

The amount of Income Tax you pay in retirement will depend on how much you receive. In general, the more you earn, the higher your tax rate will be.

What is a Personal Allowance?
A Personal Allowance is the amount of annual income you can earn before you start paying tax. For the tax year 2022-23, the personal allowance is £12,570. For everything over this amount, you will pay Income Tax at the following rates:

  • Basic rate: 20% on income between £12,571 to £50,270
  • Higher rate: 40% on income between £50,271 to £150,000
  • Additional rate: 45% on income above £150,000

National Insurance Contributions (NICs)

UK workers and employers make National Insurance Contributions to fund the state pension and other social security benefits. When you reach state pension age (currently 66), you may be entitled to receive the UK state pension based on the amount of NICs you have paid throughout your working life.

How National Insurance Tax works

You pay National Insurance when you are employed or self-employed, depending on how much you earn. But when you reach the state pension age, you don’t have to pay NICs – unless you’re self-employed and pay Class 4 contributions (more on those in a second). Once you reach this age, you stop paying Class 4 contributions at the end of the tax year.

What are Class 4 contributions? If you’re self-employed, you usually pay Class 4 National Insurance rates. You will pay 9.73% on profits between £11,908 and £50,270. And 2.73% on profits over £50,270.

From April 2023, the Government announced that people working beyond the state pension age will have to pay NICs of 1.25% on their employment earnings, introduced as the Health and Social Care levy. You do not pay NICs on income from a pension, so unless you’re employed in some way during retirement, you don’t need to worry about this tax.

Inheritance Tax

Inheritance Tax is a tax on the value of your estate when you die. If the value of your estate – including any property, assets, and money you own – exceeds a certain threshold, your beneficiaries will be subject to a hefty Inheritance Tax.

How Inheritance Tax works

Your beneficiaries will pay Inheritance Tax at 40% if your estate is worth more than £325,000 in total. The tax must be paid within six months of the wealth transfer. What is included in an estate? Find out here.

Capital Gains Tax

If you sell any assets, such as property, a business, or investments during retirement, you will most likely be subject to Capital Gains Tax. This tax is calculated based on the profit or ‘gains’ you make from the sale of the asset, but you only pay on profits above the annual tax-free allowance of £12,300. This tax-free allowance is called the Annual Exempt Amount.

How Capital Gains Tax works

For the tax year 2022-23, the Capital Gains Tax rates are:

  • 10% for basic rate taxpayers (or 18% on residential property)
  • 20% for higher rate taxpayers (or 28% on residential property)

However, if you’re a basic rate taxpayer you may pay more depending on the size of your profit when added to your taxable income. If the amount comes to more than the basic income tax band (see in ‘Income Tax’ above), you’ll pay 20%.

Reducing your tax bill during retirement

There are several ways to minimise your tax liability during retirement:

  1. Draw 25% of your private pension as a tax-free lump sum.

  2. Take an annual pension income up to the tax-free allowance limit of £12,570.

  3. Make larger contributions to your pension pot to receive tax relief from the government.

  4. Withdraw from tax-efficient Individual Savings Accounts (ISAs) before tapping into other accounts.

  5. Defer your state pension to gain a 1% government boost to your pension every nine weeks.

  6. Make full use of your Capital Gains Tax allowance to minimise the tax you pay when selling assets.

  7. Transfer your assets tax-free to a spouse or civil partner to benefit from their lower tax rate.

  8. Gift money or assets to your family members each year to reduce the value of your estate and the impact of Inheritance Tax.

Taxes are complex, so to ensure you aren’t caught out by the tax man, it’s a good idea to establish a plan. Consider working with a Financial Adviser or tax expert to make sure you understand all your options, and take full advantage of the schemes and allowances on offer.

Flagstone can help you on your savings journey towards and throughout retirement. If you would like to boost your retirement savings pot and make the most of your cash, register for a Flagstone account today.


This article is not tax advice. For advice and support on managing your taxes, speak to an expert.



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