This number is certain to have increased in the past two years, with more people now having to deal with the taxman after they stop working.
Ahead of the 2025-26 tax year starting on 6 April, we take a look at five pitfalls and key considerations that retirees will need to keep in mind.
1. The effect of frozen tax thresholds
In 2022-23, the full rate of the new state pension was worth £9,628 per year, which used up around 77% of the £12,570 personal allowance. For 2025-26, the state pension has risen to £11,973, or 95% of the personal allowance.
This is why an increasing number of pensioners are now having to pay income tax. If the thresholds had risen in line with inflation since 2022, the personal allowance would now be £15,220, and the higher-rate threshold would be £61,020.
Find out more:2. Drawing down your funds sensibly
The state pension will provide a fixed income in any tax year. Beyond that, particularly if your pension funds are in drawdown, you’ll need to control your level of withdrawals so more money doesn’t end up subject to tax. The same problem applies if you are cashing in entire pensions.
The key to making the money last is only drawing what is needed, carrying out regular reviews and navigating the tax allowances available and tax bands to ensure that your bill isn’t higher than it needs to be.
Find out more:3. Tax-free lump sums
It would be relatively easy for the Chancellor to raise money by reducing this tax-efficient option. However, it appears safe for now.
You can usually take up to 25% of your pension pots without needing to pay any tax (the PCLS). The maximum tax-free lump sum (the lump sum allowance) is capped at £268,275 for the majority of people.
While the continued availability of the PCLS is generally a good thing for retirement savers, taking the tax-free cash isn’t a straightforward decision.
Money you leave in your pension should continue to benefit from investment growth. Plus, taking a big chunk at the outset might make it harder to make the money last throughout your retirement. The change in inheritance tax rules around pensions is another factor to consider – as we'll explain next.
4. The spectre of inheritance tax
There will still be a tax-free allowance of £325,000 (the nil-rate band) and an extra allowance worth up to £175,000 (residence nil-rate band) if you leave your main home to your children or grandchildren. Unused allowances can be inherited by your spouse, boosting the potential tax-free amount to £1m.
The new rules will also apply if you’ve already started taking an income from your DC pension via drawdown or uncrystallised funds pension lump sums (UFPLS) and have unused funds.
Different approaches will need to be taken to ensure that your pension funds don’t go to the taxman. The most obvious one is to spend more of your retirement savings rather than aim to pass them on.
Gifts you make that fall outside of the set gifting limits become what are known as potentially exempt transfers (PETs). These fall out of your estate after seven years have passed. If you die before then, the gifts could end up being taxable.
Find out more:5. Tax should become less taxing
It’s always nice to end with a piece of good news.
HMRC plans to move more quickly to replace emergency tax codes with regular tax codes. This will ensure that the correct amount of tax is deducted in real-time. It will assist those taking regular income from pension drawdown but not savers taking lump sums.
HMRC explained the change in a newsletter in January 2025. It wrote: ‘From April 2025, we are improving how tax code information is used for those people who are new to receiving a private pension, so they pay the right amount of tax from the outset.
'We will automatically update the tax code for customers who are on a temporary tax code and would benefit from being on a cumulative code. This means they'll avoid an overpayment or underpayment at the end of the year.’
source https://www.which.co.uk/news/article/5-key-tax-issues-for-pensioners-in-2025-26-asDI42W4b1F2