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Every UK resident has a personal allowance — £12,570 for 2025/26 — and it is the most valuable relief most retirees hold. Income covered by it is taxed at nothing at all, whether it arrives as pension income, earnings, or savings interest.
The allowance has been frozen at this level for several years and is set to stay there for a while yet, so its real value is quietly shrinking. That makes it worth planning around rather than assuming it will always absorb your income.
The key point for retirement planning is that the allowance is use it or lose it each tax year. Unlike an ISA, you cannot carry it forward. If your income falls short of £12,570 in a given year, the unused portion simply disappears.
That creates a genuine opportunity. If you have money sitting in a pension or investment account that will eventually be taxed, drawing a little more in a low-income year — perhaps before your State Pension starts or before other income begins — can soak up allowance that would otherwise be wasted.
Marriage Allowance lets one partner transfer £1,260 of their personal allowance to the other, worth up to £252 in tax saved. To qualify, the person giving it up must have income below their personal allowance, and the recipient must be a basic rate taxpayer.
It is easy to overlook and rarely claimed automatically, but it is a straightforward gain for couples where one has a small pension or no income at all.
Couples also hold two of almost everything. Two ISA allowances, two capital gains exemptions, two personal savings allowances, two dividend allowances. Where assets are held jointly, it often pays to look at whose name they sit in — shifting savings into the lower taxpayer's name can reduce the overall bill without any complicated planning.
Savings interest is taxed at your marginal rate, but there are two reliefs that can keep a surprising amount of it tax-free.
Because the State Pension is treated as non-savings income and currently sits just below the personal allowance, many pensioners still qualify for the full starting rate. Combined with the personal savings allowance, that can mean well over £6,000 of interest escaping tax entirely.
For larger balances, cash ISAs remain the simplest shelter — the annual limit is £20,000 per person, and interest inside is never taxed or reported.
If you hold shares outside an ISA, the dividend allowance covers the first £500 of dividends tax-free each year. Beyond that, rates are 8.75% for basic rate taxpayers, 33.75% for higher rate and 39.35% for additional rate. It is a modest allowance now, but still worth using deliberately rather than by accident.
For disposals, each person has a capital gains tax annual exempt amount of £3,000. That is £6,000 for a couple, and it resets every April. If you are selling investments gradually to fund retirement, spreading sales across tax years and between spouses is often the difference between paying nothing and paying thousands.
Selling in stages also matters because gains stack on top of your other income — a large one-off disposal can push you into a higher band and drag your other income up with it.
Once your adjusted net income passes £100,000, your personal allowance is withdrawn by £1 for every £2 of excess. Between £100,000 and £125,140, that creates an effective marginal tax rate of 60% — a punishing band that catches many people in the early years of retirement when they take larger lump sums.
If you are near that threshold, consider spreading withdrawals over more than one tax year. Pension contributions and Gift Aid donations both reduce adjusted net income and can pull you back below the line, restoring some or all of the allowance.
The order in which you draw income matters too. Taking the 25% tax-free lump sum from a pension, using ISA savings in low-income years, and topping up from taxable accounts when allowance is spare can all reduce the total tax you pay across retirement.
None of these is dramatic on its own. Taken together, and reviewed once a year with your other income in mind, they can make a real difference to what you keep — and in retirement, keeping more of what you have is often the most reliable return available.
Sunset Investors shares practical, down-to-earth guidance on later-life investing and retirement finance for uk readers for readers across the UK.
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