More than 1.1 million British state pensioners are confronting an unwelcome financial surprise as HM Revenue & Customs prepares to issue tax demands on their savings income.
The Growing Tax Burden on Pensioners
According to analysis from investment platform AJ Bell, approximately 1,160,000 people will need to pay tax on income earned from their savings during the 2025-2026 tax year. This represents a dramatic increase from recent years, with the number of affected individuals more than doubling from 493,000 in 2022-23 to 953,000 in 2023-24, and reaching 1,090,000 in 2024-25.
The issue specifically impacts those over the Department for Work and Pensions state pension age who were born before 1959. In total, AJ Bell estimates that 2,640,000 taxpayers will pay income tax on cash savings interest during this financial year.
Understanding Your Savings Allowance
Most UK taxpayers benefit from a Personal Savings Allowance that provides some protection against tax on savings interest. Basic rate taxpayers can earn £1,000 in savings interest tax-free, while higher rate taxpayers receive a £500 allowance.
Charlene Young, senior pensions and savings expert at AJ Bell, explains why pensioners are particularly vulnerable: "In retirement it is common to hold a little more cash. People often want to de-risk some of their investments and those with a good handle on their spending needs might look to build a cash flow ladder to match what they've got planned for the next few years."
Protecting Your Retirement Income
Young emphasises the importance of tax-efficient saving strategies: "Likewise, Isas and pensions are the perfect way to shield your savings and investments and maximise your returns."
She provides crucial advice for those concerned about potential tax bills: "If you want to hold cash as part of your investment strategy, you can do so within a pension. You don't have to hold the money in the bank. Your provider may offer a relatively attractive rate of interest on cash held in a pension, or you could hold investment products that are comparable to cash, such as money market funds."
The expert warns pensioners about the tax implications of withdrawing large sums: "You'll pay income tax on withdrawals above your tax-free cash allowance and, once it's outside a pension, you may be subject to capital gains or dividend tax if you invest it elsewhere. If you park the money in cash you may find yourself with an added income tax bill."
With inflation posing long-term risks to cash holdings and an increasing number of pensioners being dragged into higher tax bands, understanding these tax implications has never been more critical for retirement planning.
