Retirement planning has always involved careful consideration of your tax position, but the pace of change over the past two years means that your later life plans now need closer inspection than ever before. 

Changes to pension rules, ISA allowances and Inheritance Tax thresholds have meant that tax strategies that once worked may require revisiting, especially as there are several more important reforms on the way.

This guide sets out the personal tax position as it stands, covering what has already changed and what is still to come.

It is not a substitute for advice tailored to your own circumstances and if any of this raises questions about your specific situation, our team is here to help.

Pensions and tax: What’s changing

Pension contributions still receive tax relief and the money in a pension pot still grows free of Income Tax and Capital Gains Tax while it stays invested.

What has changed is the tax treatment once that money is drawn and, increasingly, what happens to unused pension funds after death.

Unused pensions and Inheritance Tax

From 6 April 2027, most unused pension funds and death benefits will form part of your estate for Inheritance Tax purposes.

Previously, many people drew on other savings first and left pensions untouched, on the basis that unspent pension funds could usually pass to beneficiaries free of Inheritance Tax.

That advantage will soon be withdrawn and needs to be considered sooner rather than later.

There is a further complication for anyone who dies after age 75. If a pension is passed to someone other than a spouse or civil partner, such as a child or grandchild, it can be taxed twice.

The first time through Inheritance Tax on the estate and again through Income Tax when the beneficiary withdraws the funds.

Anyone whose estate planning has relied on pensions sitting outside the taxable estate should treat this as a trigger to review that plan before April 2027.

Inheritance Tax remains charged at 40 per cent on estates above the available allowances and several of the rules determining what counts towards an estate are changing.

The nil-rate band, the amount an estate can be worth before Inheritance Tax applies, is frozen at £325,000 until April 2030.

Because this threshold is not rising with inflation or asset values, more estates are likely to become liable for Inheritance Tax over time simply because the value of property and other assets continues to increase.

The Money Purchase Annual Allowance

If you take a flexible withdrawal from a defined contribution pension, this triggers the Money Purchase Annual Allowance or MPAA.

Once triggered, the amount you can pay into a pension each year and still receive tax relief on drops from the standard annual allowance, currently £60,000 for most people, down to £10,000.

Unused MPAA cannot be carried forward from one year to the next, unlike the standard annual allowance.

This matters for anyone thinking of easing into retirement while continuing to contribute to a pension, since an early flexible withdrawal can permanently restrict what you are able to pay in and still receive relief going forward.

Tax on pension withdrawals

The earliest age you can normally access a private pension without triggering a tax charge is known as the Normal Minimum Pension Age, currently 55.

This applies to most defined contribution schemes. Some people hold a protected pension age that lets them access their pension earlier than this and it is also possible to access pension savings before the Normal Minimum Pension Age on ill health grounds.

The Normal Minimum Pension Age is rising to 57 from 6 April 2028. Anyone who turns 55 before that date will still be able to access their pension at 55, but anyone who has not yet reached 55 by 6 April 2028 will need to wait until they turn 57 instead.

There is no transitional period between the two ages, so the change takes effect on that date regardless of any retirement plans already in motion.

Members of certain schemes, including those for the armed forces, police and fire services, are not affected by the change.

Once you can access your pension, you can normally take up to 25 per cent of the pot tax-free.

The remaining 75 per cent is taxable as income, whether it is withdrawn as a lump sum or in instalments and is added to your other income for the year when working out your tax band.

How your State Pension is taxed

The State Pension is taxable income, in the same way that a salary is. It is paid without any tax deducted, so any tax due on it is collected through your other income, either via PAYE if you are employed or through Self Assessment if you are self-employed.

For the 2026/27 tax year, the full new State Pension is worth £12,547 a year. The standard personal allowance is £12,570, so most pensioners whose only income is the State Pension will not pay Income Tax on it.

Where you have additional income, from continued employment, a private pension, savings or rental income, that additional income is what determines whether you cross into a taxable position.

State Pension age is also rising, from 66 to 67, phased in for those born between 6 April 1960 and 5 March 1961, with anyone born after 6 March 1961 receiving their State Pension at 67.

This does not change how the State Pension is taxed, but it does change when it starts counting as income.

Filling gaps in your National Insurance record

Your State Pension entitlement depends on your National Insurance record. Where there are gaps, often caused by time out of work or time spent abroad, it is sometimes possible to make voluntary contributions to fill them and increase your entitlement.

You can generally only fill gaps going back six tax years, so this is worth checking sooner rather than later if you suspect your record is incomplete.

It is worth confirming that a voluntary contribution will actually increase your pension before paying it, since this is not always the case depending on your circumstances.

Cash ISAs: A shrinking tax shelter

Cash ISAs remain one of the simplest tax reliefs available, sheltering interest from Income Tax entirely. That shelter is being reduced for most savers.

The current annual ISA allowance is £20,000 and this can currently all be held in cash. From 6 April 2027, the amount of that allowance you can hold in a Cash ISA falls to £12,000 if you are under 65.

The remaining £8,000 must go into a different type of ISA, such as a Stocks and Shares ISA or an Innovative Finance ISA, to use the full £20,000 allowance. Savers aged 65 and over are unaffected and retain the full £20,000 cash allowance.

This is the first reduction to the Cash ISA allowance since 2017. Anything already held in a Cash ISA keeps its tax-free status.

The change only affects new contributions made from April 2027 onwards, which means the current tax year and 2027/28 are the last two in which anyone under 65 can shelter the full £20,000 in cash.

Savings and dividend tax rises

Outside an ISA, the tax treatment of savings interest and dividend income is also becoming less favourable.

From April 2027, the rate of tax charged on savings interest is rising by two percentage points across every band.

The Personal Savings Allowance, which currently lets most basic and higher rate taxpayers earn some interest tax-free, is unaffected by this change, but any interest above that allowance will be taxed at the new, higher rates.

Dividend tax has already increased. From April 2026, the basic rate of dividend tax rose from 8.75 to 10.75 per cent and the higher rate rose from 33.75 to 35.75 per cent. This is relevant for anyone drawing income from company shareholdings or investment portfolios held outside a tax wrapper, since it directly reduces net returns from that income.

Together with the Cash ISA changes, these increases make the case for reviewing where savings and investment income sits from a tax perspective, particularly for anyone with meaningful holdings outside an ISA.

Business and agricultural property relief

From 6 April 2026, the 100 per cent relief available on qualifying agricultural and business property is capped for the first time.

The first £2.5 million of combined agricultural and business assets continues to receive 100 per cent relief. Anything above that threshold receives 50 per cent relief, which equates to an effective Inheritance Tax rate of 20 per cent on the excess.

Where you are married or in a civil partnership, any unused portion of this £2.5 million allowance can be transferred to your partner, meaning couples can potentially pass on up to £5 million of qualifying assets between them without this cap reducing relief.

The cap also applies to qualifying property held in trust and Inheritance Tax due on qualifying agricultural or business assets can be paid in interest-free instalments over ten years, which remains unchanged.

Shares listed on the Alternative Investment Market and other unquoted shares that previously qualified for 100 per cent relief now receive 50 per cent relief instead.

Reviewing your position

Because so much has changed, or is due to change, over a short period, the basics of your Inheritance Tax position are worth revisiting.

Start with the total value of your estate including pensions, then check how close that value sits to the available thresholds and reliefs.

From there, it becomes clearer which of your assets are affected by the changes set out above.

How we can help

Our tax team is staying on top of these changes as they are confirmed and phased in and can help you understand how they apply to your specific tax position.

That covers reviewing how the pension changes affect your estate and checking whether voluntary National Insurance contributions would benefit your State Pension entitlement.

We can also work through the Inheritance Tax implications of the reliefs outlined above.

If any of the changes in this guide raise questions about your own tax position, get in touch with our team .