Many people work beyond traditional retirement age, either because they can’t afford to retire, they want to stay active, or simply because they enjoy it, but may need to start taking money from their pension to supplement their income.
In the first three months of 2025, 12.4% of over-65s were employed, according to the Office for National Statistics, equivalent to around 1.59 million people in the UK. Charles Incledon, director at Bowmore Financial Planning, said: “Working past retirement age can be a very fulfilling thing to do for some – so long as it’s done by choice. For those who are forced to do so because of their financial circumstances, it’s often stressful and demoralising.”
Most pensions allow you to access your money from the age of 55 (rising to 57 from 2028), which can be useful if your employment income alone doesn’t cover all your costs. However, combining paid work with pension income can have a significant impact on your tax situation, so it’s really important that you aren’t caught out by an unexpected tax bill.
Here, we explore how your income is taxed when you work and draw your pension at the same time, and how to avoid common pitfalls.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,000 reviews on VouchedFor, the review site for financial advisors.
How does income tax work in retirement?
If you’re working and taking your pension at the same time, the tax rules are broadly the same as for anyone else, insofar as you’ll be taxed on your total income above your tax-free personal allowance.
For the current 2025/26 tax year, the personal allowance is £12,570, so any income you receive above this threshold is taxed at the usual income tax rates:
| Band | Taxable Income | Tax Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Normally, if you’re employed, any tax you owe is deducted at source. That means it’s taken off your pay before you receive it. If you’re self-employed however, you’ll be responsible for declaring any tax you owe via a self-assessment tax return. Your tax will then typically be paid in two tranches each year, one at the end of January and one at the end of July.
Similarly, payments you receive from the State Pension are taxable, but it’s paid to you gross – that is, without any tax taken off. If it’s your only source of income and it’s less than your personal allowance, you won’t pay any tax. However, if you’re earning from a job or receiving other pension income, your State Pension can push your total income above your tax-free threshold.
Because HMRC doesn’t deduct tax directly from the State Pension, they usually adjust the tax code on your employment or private pension income to collect the tax due.
Tax on private and workplace pensions
Most private and workplace pensions are defined contribution pensions, a type of pension where the amount you receive when you retire depends on how much you and your employer have contributed (if it’s a workplace pension) and how the investments made on your behalf have performed.
If you have a defined contribution pension and start drawing money from it (via drawdown or lump sums), the first 25% of what you take is usually tax-free. The remaining 75% is taxed as income at your marginal rate – meaning it’s added to your other income and taxed accordingly.
This means you could be pushed into a higher tax band if you take a large lump sum in one go.
If you have a defined benefit pension, this promises to pay out a guaranteed income when you retire. These pensions are often known as ‘final salary’ schemes. Income from a defined benefit pension is taxed like any other income. You usually receive a regular, guaranteed income – and again, 25% of the pension value may be available as a tax-free lump sum when you first access it, with the rest taxed as income.
Working and taking your pension: how much tax will you pay?
To help you work out how much tax you might have to pay if you’re working and taking your pension, we give some examples below:
Example 1:
Janet, aged 66 – working part-time and drawing her State Pension
Part-time salary: £10,000 a year
State Pension: £11,973 (full new State Pension 2025/26)
Total income: £21,973
Janet’s personal allowance is £12,570, so she pays tax on £9,403 (£21,973 – £12,570).
She falls into the basic rate tax band, so the £9,403 is taxed at 20% = £1,880.60
As Janet’s State Pension is paid gross, HMRC will likely adjust her part-time job’s tax code to collect the tax due on both income sources.
Example 2:
Simon, aged 62 – still working full time and taking a defined contribution pension
Full-time salary: £40,000
Pension drawdown income: £12,000 a year (after taking 25% tax-free cash)
Total income: £52,000
Simon’s total income exceeds the basic rate threshold (£50,270), so part of his pension income will be taxed at the higher rate.
Personal allowance: £12,570
Taxable income: £39,430 at 20% = £7,886
Remaining £1,730 taxed at 40% = £692
Total tax = £8,578
This example of how pension income can tip you into a higher tax band if you’re also working.
Example 3:
John – self-employed and taking ad-hoc lump sums from pension
Age: 60
Self-employed income: varies, around £15,000 a year
Pension lump sum: takes £20,000 from a defined contribution pension this year
On a £20,000 pension withdrawal:
£5,000 (25%) is tax-free
£15,000 is added to Johi’s other income
Total taxable income: £30,000
John’s personal allowance covers the first £12,570
£17,430 taxed at 20% = £3,486
But here’s the catch: if this is John’s first pension withdrawal it might have been taxed using an emergency tax code, potentially resulting in too much tax being deducted up front.
He may need to claim a tax refund from HMRC or wait for the end-of-year adjustment.
For example, if you take £10,000 from your pension, HMRC might assume you’re going to take £10,000 every month and tax you as if you’re earning £120,000 a year. HMRC is overhauling its systems to try to prevent overcharging, but if you’re concerned about being overcharged, you can reduce the risk of making a significant tax overpayment by only taking a small amount from your pension initially, rather than a large lump sum.
Find out more about pensions and tax in our article How much tax will I pay on pension withdrawals?
What about National Insurance?
Once you reach State Pension age, you don’t normally pay National Insurance on your earnings from employment or self-employment. This can make working in later life more financially attractive.
However, if you’re below State Pension age and working while drawing your pension, you’ll still pay National Insurance on your employment income – but not on the pension income itself.
A final thought…
Taking your pension while working can provide flexibility and support your lifestyle, but it does have tax implications. Keeping careful records of all your income sources, including your salary, pensions, dividends, any rental income and so on, is therefore essential if you want to understand your total tax liability and avoid unexpected tax bills.
If you’re working and want to take money out of your pension, remember that withdrawing a big lump sum in one go can push you into a higher tax bracket, so you might want to consider spreading withdrawals across multiple tax years to reduce your tax liability. You can learn more about keeping your tax bills down in retirement in our article 6 ways to pay less tax in retirement.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,000 reviews on VouchedFor, the review site for financial advisors.
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