Retirement Tax

The 2026/27 tax bands

UK income tax in 2026/27 is charged in slabs. The personal allowance is £12,570 - the same for retirees as for anyone else, with no age-related top-up since the old allowance was abolished in 2016. The basic rate of 20% then applies on income up to £50,270, higher rate 40% from £50,271 to £125,140, and additional rate 45% above. The personal allowance has been frozen since 2021/22 and is scheduled to stay frozen until at least April 2028, with several forecasters expecting fiscal-drag extensions out to 2031.

Pension drawdown, the State Pension, annuity income, occupational pensions and rental profits all count as non-savings, non-dividend income - the most heavily-taxed category. They stack on top of each other before any band is applied. The same £20,000 of taxable drawdown costs £4,000 of tax for a basic-rate taxpayer and £8,000 for a higher-rate taxpayer, just because of what other income is already in the picture.

Above £100,000 of total income, the personal allowance tapers at the rate of £1 lost for every £2 over the threshold. By £125,140 the allowance is gone entirely. Inside that £25,140 band the effective marginal rate is 60% - 40% income tax on the extra pound, plus another 20% from the disappearing allowance. Drawdown taken right up to this cliff is one of the most expensive tax mistakes in retirement, and one of the easiest to avoid with two-tax-year splitting.

State Pension is taxable

The full new State Pension is £241.30 a week, or £12,547.60 a year in 2026/27. The personal allowance is £12,570. That leaves precisely £22.40 of headroom before basic-rate tax bites. For anyone with a full or near-full entitlement, every pound of taxable drawdown income and every pound of taxable savings interest above the personal savings allowance is taxed at 20% from the very first pound.

DWP pays the State Pension gross - no tax is deducted at source, because DWP is not a PAYE employer. HMRC collects the tax owed by reducing the tax code that applies to your other PAYE income, usually a private pension, drawdown PAYE stream or final-salary pension. Read your March and April coding notices carefully: the State Pension is the most common reason a tax code is much lower than the standard 1257L.

The State Pension has risen by 4.1% in 2026/27 under the triple lock. If the triple lock continues to deliver mid-single-digit uprating, the full new State Pension is likely to exceed the frozen £12,570 personal allowance during 2027/28 or 2028/29 - at which point even pensioners with no other income at all will start paying small amounts of income tax for the first time. Once that crossover happens, HMRC has to set up a simple assessment process, because there is no PAYE source to collect the tax through.

Drawdown tax - the basics

Every pound that comes out of a defined-contribution pension is split in two. The 25% tax-free element - the PCLS, or the tax-free slice of a UFPLS - is paid free of income tax, does not appear on your tax code, and does not eat into your personal allowance. The other 75% is taxable at your marginal rate, stacked on top of your State Pension and any other income.

Drawing any taxable income from a DC pension also triggers the Money Purchase Annual Allowance (MPAA): from that day, your annual DC contribution allowance drops from £60,000 to £10,000 for 2026/27, and carry forward of unused allowance no longer applies to DC pots. Taking only the 25% PCLS does not trigger the MPAA - but the first taxable pound does, and you cannot un-trigger it. If you are still working and accumulating a workplace pension, do not crystallise anything taxable until you stop.

Expect the first withdrawal to be heavily over-taxed. HMRC's PAYE system applies a Month-1 emergency code that projects the lump sum as if it were monthly income for the whole tax year. A £20,000 first UFPLS in spring can attract £4,500+ of tax instead of the £3,000 actually due. In Q1 2026 alone, HMRC repaid roughly £44 million of over-deducted pension tax. The average refund per claim is north of £3,000. The three reclaim forms are P55 (pot not emptied), P53Z (emptied, with other income), and P50Z (emptied, no other income).

The 25% tax-free element

The lifetime ceiling on tax-free pension cash is the Lump Sum Allowance (LSA) of £268,275, in force since 6 April 2024 when it replaced the Lifetime Allowance. Most retirees never come close to it: it would take a pension pot of more than £1.07 million to generate that much tax-free cash at the standard 25% rate.

Three ways to take it. PCLS takes the full 25% in one go up-front, and the remaining 75% sits in flexi-access drawdown to be drawn at your own pace. UFPLS takes a slice of the whole pot at once - 25% tax-free, 75% taxable, every time. Phased drawdown crystallises smaller chunks each year, drawing the 25% tax-free slice of each chunk to fill a target income. Mathematically, taking £268,275 of tax-free cash all at once costs the same as taking it in slices - the difference is timing, growth on the residual pot, and which trigger events apply.

Scotland is different

Scottish-resident taxpayers pay Scottish income tax on their pension drawdown, occupational pension and State Pension income. Scotland uses six bands in 2026/27: starter 19% on £12,571-£16,537, basic 20% on £16,538-£29,526, intermediate 21% on £29,527-£43,662, higher 42% on £43,663-£75,000, advanced 45% on £75,001-£125,140, and a top rate of 48% above £125,140 (introduced in April 2024). The £12,570 personal allowance is the same UK-wide. HMRC flags you as Scottish-resident based on where your main home is during the tax year, and your tax code is prefixed with an S.

Marriage Allowance

Probably the most under-claimed retirement tax break. If one spouse or civil partner has income below the £12,570 personal allowance and the other is a basic-rate taxpayer (£12,571-£50,270, or up to £43,662 in Scotland), the lower earner can transfer £1,260 of personal allowance to the higher earner. The recipient pays £252/year less tax. Claims can be backdated four tax years - worth roughly £1,000 in arrears if eligibility has held the whole time. Apply once through GOV.UK; the election rolls over automatically until cancelled or circumstances change.

April 2027 - pensions enter the IHT estate

The single biggest retirement-tax change of the decade lands on 6 April 2027. From that date, unused defined-contribution pension funds and most lump-sum death benefits will form part of the deceased member's estate for inheritance tax purposes. The 40% IHT rate applies above the £325,000 nil-rate band (plus the residence nil-rate band where applicable). The Office for Budget Responsibility estimates the change will pull up to 10,500 additional estates a year into IHT.

What is changing: the long-standing "pensions are outside the estate" planning rule that made SIPPs a wealth-transfer vehicle of choice over the past decade. What is not changing: the spousal exemption, which means anything passing to a UK-domiciled spouse or civil partner remains entirely IHT-free; and the pre-75 / post-75 income-tax treatment of beneficiary withdrawals - beneficiaries of someone who died before age 75 can still draw the pot income-tax-free, while those inheriting from someone who died after 75 pay income tax at their own marginal rate.

Planning implications worth thinking through with an adviser before April 2027: whether to draw earlier in retirement to leave less in the wrapper at death; whether to gift surplus income or lump sums under the seven-year-rule or the "normal expenditure out of income" exemption; whether the residence nil-rate band - which tapers above a £2 million estate - is now in scope for a household it previously did not affect; and whether spousal bypass trusts or revised expression-of-wish nominations still make sense under the new regime.