When you think of retirement, images of sandy beaches, green golf courses or long lunches may spring to mind. Chances are that the taxman rarely features.

Yet a growing number of people are paying income tax in retirement. Some 11 per cent of taxpayers were aged 75 or over in 2022-23, according to the latest HM Revenue & Customs figures, up from 7 per cent in 2011-12. In total, 7.13 million people of pension age paid tax that year.

Pensioners now account for almost 21 per cent of taxpayers and 7 per cent of the total tax take. At £11,973, the full new state pension is on track to exceed the £12,570 personal allowance (the income you can have each year without paying tax on it) by 2027 — and those planning their retirement must also contend with less generous tax-free allowances for capital gains and dividends, as well as a growing inheritance tax net.

So diligent tax planning has never been more important. Whether you are approaching retirement or already enjoying it, here are some of the biggest factors to consider.

Before retiring

Boost your pension
Tax planning should start well before you stop working. The years leading up to retirement are the time to take advantage of tax-efficient savings and investments.

Focus on your pension. Savers can put up to £60,000 into their pension each year and enjoy tax relief on the contributions at their income tax rate, so 40 per cent for a higher-rate taxpayer. As well as boosting your contribution this reduces your take-home pay, and so cuts your income tax bill.

The average pension pot for someone aged 55-64 is £137,800, according to the Office for National Statistics. If they contributed £10,000 a year (including basic-rate tax relief) to their pension their pot could reach £373,232 after ten years, according to the wealth manager M&G, assuming annual investment growth of 4 per cent after fees.

Chris Etherington from the accountancy firm RSM said: “A key benefit of making pension contributions now is that they can reduce your income tax liability and defer it to the future, when a lower tax rate may apply because your earnings may be lower.”

Max out your Isa
Next, make use of Isas. You can put £20,000 each tax year into these accounts and, while there is no tax relief on the contributions, there is no tax payable on any gains made or withdrawals — for life.

Other savings
Once this is maxed out, consider other savings options such as Premium Bonds. These do not offer a guaranteed rate of interest like other savings accounts but instead enter you into a monthly draw to win prizes ranging from £25 up to two £1 million jackpots. You can invest up to £50,000 and importantly, all prizes are tax-free.

Those with more to invest could consider enterprise investment schemes and venture capital trusts, which give tax perks to those backing early-stage companies. It is possible to get income tax relief of 30 per cent on these investments, as long as they meet certain criteria and the shares are held for at least three years for enterprise schemes and five for venture capital trusts.

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“The tax reliefs can be extremely valuable but the trade-off is that the underlying investments are in early-stage businesses so there is a higher risk that they might fail,” Etherington said.

Married couples should ensure their assets are divvied up efficiently. If one spouse stops working first or is a low earner, make use of the marriage allowance. This lets a non-taxpaying spouse transfer part of their £12,570 personal allowance to their partner. Transferring the maximum £1,260 saves £252 in income tax.

“Also ensure that income-producing investments such as rental properties are held in the name of the lower taxpaying spouse,” said Barrie Dawson from M&G. For assets that are jointly owned, HMRC assumes the income is split equally and taxes it accordingly.

Early retirement

“Carry on working” might not be a welcome tip for those who have been dreaming of freedom, but it can be surprisingly tax-efficient. This is because those who have reached state pension age (66, rising to 67 between April 2026 and March 2028) do not pay national insurance.

This tax is usually charged at 8 per cent of weekly earnings between £242 and £947 (equivalent to the £12,570 tax-free allowance and £50,270 higher-rate income tax threshold over a year), so not paying it could save you about £3,000 a year, said Nimesh Shah from the accountancy firm Blick Rothenberg.

About 9.5 per cent of those aged 66 and over (1.12 million people) are still in work. This is up from 8.7 per cent (880,000 people) a decade ago, according to the charity Age UK.

Those still working could defer their state pension, and this could pay off if taking it would push them over an income tax threshold. For every nine weeks you delay the payment, it rises 1 per cent. This works out at roughly a 5.8 per cent increase if you defer for a year — an extra £13.35 a week on the full new state pension of £230.25 a week.

Whether this leaves you better off in the long term really depends on how much more tax you would have paid if you had taken your pension, and how long you live in retirement. At £13.35 a week it would take more than 17 years to earn back a year of deferred state pension at its present level, without factoring in tax or future rises to the payment.

£30,000 a year tax-free

Make use of other allowances too — if you are clever and can use them all you could make £31,570 a year entirely tax-free, Shah said. Here’s how.

As mentioned above, you can earn £12,570 a year income tax-free. If you don’t bust this threshold you also get an extra savings allowance. Basic rate taxpayers can earn £1,000 in savings interest tax-free, but if you earn less than £12,570 you qualify for the starting rate for savings, which means an extra £5,000 a year savings allowance on top. Once you earn above £12,570 the starting rate allowance is tapered away at £1 for every extra £1 earned. Once you earn £17,570, you no longer get the starting rate.(Higher-rate payers get a £500 savings allowance and additional-rate payers get nothing).

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Then you can earn £500 a year income from dividends tax-free and £3,000 in capital gains before paying tax.

Retirement side hustles can also be tax-efficient. The trading allowance lets you earn £1,000 a year tax-free from casual income, such as babysitting, dog walking or selling arts and crafts. The property allowance lets you earn £1,000 tax-free from your home, for example by renting out the driveway, or a garage as storage space.

Those with a spare room can make £7,500 rental income tax-free with the rent-a-room scheme. The room must be fully furnished to qualify, and the allowance is per household not per person.

Later retirement

Spending your pension
Once you start withdrawing your pension, think carefully about exactly how you do it. You can take 25 per cent of your pot tax-free, up to a maximum of £268,275. But unless you need the lump sum all in one go, it may make sense to do this in stages so that some of the money can stay invested and continue to grow.

Once you have taken your tax-free proportion, phased withdrawals can help to manage your taxable income and avoid tipping you into higher income tax bands, Shah said.

Making ad hoc withdrawals from your pot rather than taking a fixed, regular amount can be a useful strategy for managing your tax bill. Consider drawing less in years where you may have capital gains to realise, for example.

Your inheritance
Make sure your will is up to date, said Paul Barham from the tax consultancy Forvis Mazars. The Money and Pensions Service, an advice body, estimates that 53 per cent of those aged 50-64 do not have a will, and 22 per cent of those 65 and over. Those who die without a will (known as intestate) have their assets allocated according to intestacy rules, rather than their own wishes. “This can mean that some of your estate may be subject to inheritance tax of up to 40 per cent that could have been avoided with legitimate will planning,” Barham said.

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Give some thought to inheritance tax mitigation at this point. Make use of all the gift allowances that are available — you can give away £3,000 a year without the gifts later being counted as part of your estate for inheritance tax purposes and make smaller gifts to different people. “The £3,000 exemption and the extra small gifts exemption of £250 per person may seem small, but can help reduce exposure to inheritance tax, and can add up if you start early,” Dawson said.

Larger sums can be given away tax-free as long as you live for seven years after making the gift.

You can also give away money from any surplus income and it will be immediately exempt from inheritance tax. To qualify it must be paid from your regular monthly income and it should not affect your standard of living. Keep records of all gifts and income.

The value of gifts made under this rule soared 177 per cent to £144 million in the 2023-24 tax year compared with the year before, according to the law firm TWM Solicitors.

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Consider not just what you are passing on, but what you might inherit from your partner. Anything left to a spouse or civil partner is free of inheritance tax, but passing on an Isa comes with the added benefit of any further gains continuing to be protected from the taxman.

Isa allowances can also be inherited tax-free from a spouse or civil partner. This allows a spouse to benefit from a higher tax-free allowance, even if their partner left the actual assets in the Isa to someone else.

Pensions will continue to be passed to spouses or civil partners free of inheritance tax after April 2027 when retirements pots will be counted for inheritance tax. However, a surviving spouse will still need to pay income tax on any money withdrawn from an inherited pension if their partner died after the age of 75, so the same care should be taken to keep withdrawals under tax thresholds where possible.

Drastic measures
Those who are determined to avoid an inheritance tax bill might consider moving abroad, Etherington said. A number of countries, including Portugal and Canada, do not technically have inheritance tax, although there are plenty of rules about where assets are held and other taxes to navigate.

“If someone spends sufficient time offshore, their non-UK assets may no longer be subject to inheritance tax,” he said. “Of course, you need to understand the tax regime in the country you are moving to and whether other comparable taxes might apply.”