MoneyWeek reports that frozen thresholds and allowances will push one million more pensioners into the Income Tax regime in 2031. Alongside those paying Income Tax in retirement for the first time, others could be pushed into higher brackets by successive freezes.
There are several ways to mitigate a rising tax bill, including the use of tax wrappers like ISAs, accessing pension tax-free cash effectively, and maximising allowances as a couple.
The Marriage Allowance is a good example of the latter, allowing a lower-earning partner to transfer some of their Personal Allowance to a higher-earning partner.
Keep reading for a closer look at the Marriage Allowance and other ways to mitigate the impact of frozen allowances.
Frozen thresholds will see the number of Income Tax-paying pensioners rise by 600,000 this tax year alone
The Income Tax threshold is the amount you can earn before there is tax to pay. It’s been frozen at £12,570 – known as the Personal Allowance – since April 2021 and is set to remain at this level until 2031. The higher- and additional-rate thresholds (£50,271 and £125,141 respectively) are also frozen until 2031.
Over the next five years, your income could increase due to rising pay, investment growth, and increases to the State Pension. Back in April 2021, for example, the full new State Pension was worth £179.60 a week – or just over £9,339 a year. By April 2026, these figures had increased to £241.30 a week, equal to £12,547.60 a year.
You’ll note that the annual figure for this year is very close to the Personal Allowance, meaning that anyone in receipt of the new State Pension and any other income (even if that income is relatively small) could be liable to pay some basic-rate tax.
If you are a high earner or are in receipt of a significant annual pension, rises to other income, like buy-to-let rent or regular investment dividends, could push you into a higher bracket and impact the tax you pay.
MoneyWeek confirms that the Office for Budget Responsibility expects the number of Income Tax-paying pensioners to rise by 600,000 (to around 9.3 million) in 2026/27.
3 ways to mitigate a tax bill as a couple
1. The Marriage Allowance
If you are married or civil partnered, the lower-earning partner can pass a portion of their Personal Allowance to the higher earner in some circumstances.
To be eligible for the Marriage Allowance, one partner must usually have income below the Personal Allowance (£12,570 until at least 2031), while the higher earner pays tax at the basic rate.
The lower-earning partner then effectively transfers £1,260 of their Personal Allowance to their spouse or civil partner, thereby reducing the latter’s tax bill by as much as £252 a year.
Claims can be backdated for up to the last four tax years (if you were eligible during those years). It is here that significant savings could occur if you haven’t claimed this allowance before.
2. Maximising pension tax-efficiency
Pensions are incredibly tax-efficient, so making the most of this efficiency could help to keep your tax bill low in retirement.
You might prioritise the higher earner’s pension during the accumulation stage, for example, allowing you to claim the maximum amount of tax relief – essentially a free top-up from the government. Applied automatically at 20% for a basic-rate taxpayer, higher earners can claim more via Self Assessment.
A £100 increase to your pension pot would cost you £80 as a basic-rate taxpayer, £60 if you pay the higher rate, and just £55 for additional-rate payers. Tax relief is usually available up to the Annual Allowance (£60,000 for the 2026/27 tax year) or 100% of your earnings, whichever comes first.
Carefully timing and managing withdrawals could also help to mitigate an unexpected Income Tax bill. While 25% of your overall defined contribution pot can usually be accessed as tax-free cash, the remainder is taxed as income.
If you need to access large cash sums in one go, this could push you into a higher tax bracket and result in a portion of your payment being taxed at a higher rate. Splitting a payment between you and your partner’s pension could help to mitigate this, as could careful management of your tax-free cash entitlements.
Expert advice can help here, so get in touch.
3. The Capital Gains Tax Annual Exempt Amount
While not related specifically to the income you earn, you might be looking to make regular or one-off asset disposals to supplement a retirement income and to keep Income Tax low.
Doing so could see you become liable for Capital Gains Tax (CGT), so you must understand the rules that apply.
You pay CGT when you sell (or “dispose of”) assets and make a profit that exceeds the Annual Exempt Amount. For 2026/27, your individual allowance is £3,000, meaning that you can make this much profit on a sale with no CGT to pay.
Combine your annual exempt amount with a partner – by transferring assets prior to a sale – and you effectively double this exempt amount. You might also consider the timing of large disposals, making sales either side of a tax year to effectively use two years’ exemption on one split sale.
Get in touch
Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you manage rising tax bills.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
