How the United Kingdom taxes a retirement plan

We model these and we know we do not get them exactly right. Where the size could be measured, it is stated.

• We tax a couple by splitting the household income in two and giving each half its own tax-free allowance and its own bands. That is exact where both partners have similar incomes. Where one has most of it we share more than the law allows, so the tax is understated, by up to 12,460 a year with 100,000 on one partner. Two allowances that would push the other way are missing and worth far less: one where a partner is 91 or over, and one for registered blind people.

  Your real tax is higher/up to £12,460 a year/couples where one partner has most of the income

• From 2031 our model lets the whole tax scale start rising with prices again, which is what the law restores for the 12,570 tax-free allowance and the 37,700 basic rate band. The 125,140 point where the 45 percent rate begins has been frozen since 2023 with no end announced, and we unfreeze that too, so our figure is slightly low. Removing the 45 percent band altogether moves lifetime tax by nothing on an ordinary plan and 1.1 percent on a 2 million pound portfolio, and this is a fraction of that.

  Your real tax is higher/anyone whose income passes 125,140 in the later years of a long plan

• Your 12,570 tax-free allowance is withdrawn once income passes 100,000, by a pound for every two, which makes each pound in that stretch effectively cost 60 percent. The law works that out from income alone and leaves capital gains out of it. We include the gain you took that year, so a big selling year can start the withdrawal earlier than it should and we show more tax than you would pay.

  Your real tax is lower/anyone whose income passes 100,000 in a year when they also sell investments at a profit

• Income a fund keeps rather than pays out is still taxable in the year the fund earns it, and we charge it that way. The detail is coarser than the law: the charge really lands about six months after the fund's year end, it falls on whoever held the fund on that date, and it covers only the part of the income that was not paid out. That part is small for an equity fund and close to the whole yield for a bond fund that reinvests.

  Could go either way/anyone holding an accumulating fund in a taxable account, most of all an accumulating bond fund

• If you let a property with a mortgage on it, we are wrong in a way that matters. We take rent as one net figure after interest. The law counts the full rent as income and gives back at most 20 percent of the interest, so 30,000 of rent with 20,000 of interest counts as 30,000 against every threshold you are tested against, not 10,000, and your bill is higher than we show. Two small reliefs go the other way: 1,000 of rent tax free, and about 7,500 for letting a room at home, a figure we have not re-checked.

  Your real tax is higher/anyone letting out a property with a mortgage on it

These exist in law and we leave them out, usually because applying them would need a question we do not ask.

• We assume every fund you hold has UK reporting status. One without it is taxed far harder: the whole profit counts as income at 20, 40 or 45 percent, with no 3,000 tax-free amount and no losses to set against it. On a 100,000 profit that is about 40,000 of tax against the 23,280 we show. The status is granted share class by share class, and a fund based in the United States almost never has it. Our source material calls this the single largest avoidable trap in British investment tax.

  Your real tax is higher/up to £16,720 once/anyone holding a fund without UK reporting status, which includes almost every fund based in the United States

• There are two ways to take money from a pension: take the tax-free quarter up front and have every later payment taxed in full, or leave it invested and have a quarter of each payment come out tax free. We model the first. The second spreads the tax-free part across your whole retirement, and in one worked case it leaves 6,000 a year more in hand on the same 100,000 withdrawal, so we show too much tax if that is your route. We never ask which you plan to use.

  Your real tax is lower/up to £6,000 a year/anyone taking a pension a piece at a time rather than taking the tax-free quarter up front

• Scotland sets its own income tax rates on pension, earnings and rent, and we use the rates for England, Wales and Northern Ireland. Below about 29,000 of pension Scotland is slightly cheaper, by around 40 a year, so we show a little too much. Above about 43,663 it is dearer and the gap widens fast: roughly 1,496 a year more at 50,000 and 2,050 at 75,000. Interest, dividends, gains and the tax-free allowance are the same across the United Kingdom.

  Could go either way/up to £2,050 a year/anyone retiring in Scotland

• Announced changes take effect in April 2027 and we still charge today's rates. Interest moves up to 22, 42 and 47 percent, rental income gets its own ladder at those same three rates, and the yearly limit on a tax-free cash savings account falls to 12,000 for under-65s. On the largest of the worked cases in our source material the interest change alone adds about 470 a year, so from that date our figure is too low.

  Your real tax is higher/up to £470 a year/anyone with taxable interest or rental income in a plan that runs past April 2027

• If you are over 66 and your income passes 35,000, the winter fuel payment is taken back through the tax system, as a fixed 200 to 300 rather than a rate on the excess. We do not charge it, so your tax is understated by roughly that much. It is new for this tax year and it is small next to everything else here.

  Your real tax is higher/up to £300 a year/anyone over 66 with income above 35,000 who received the winter fuel payment

• We do not model the limits around a pension pot. The tax-free quarter is capped at 268,275, so a pot above about 1,073,100 does not get a quarter of it free of tax the way we assume, and our tax is too low. Two more can reshape a plan rather than just misprice it: taking a single pound of flexible drawdown cuts what you may pay in each year from 60,000 to 10,000 for good, and from April 2028 you cannot touch a private pension before 57.

  Your real tax is higher/anyone with a pot above about a million, anyone still paying in after drawing, and anyone planning to retire at 55 or 56

Separate tax systems, or rules that only bite outside a retirement plan.

• From April 2028 an English home worth 2 million or more carries an extra yearly council charge of 2,500 to 7,500 depending on its band, paid by the owner, with no exemption for the home you live in. It is a charge on the property rather than on your savings or your pension, so it belongs in your spending rather than in the tax we show.

  Could go either way/up to £7,500 a year/owners of an English home worth 2 million or more, which is fewer than one property in a hundred

• Inheritance tax is a separate system and we do not model it. It takes 40 percent above a tax-free 325,000, with a further 175,000 where the estate includes a home, and nothing at all between spouses. From April 2027 most unused pension money counts as part of the estate, which reverses the old advice to spend other savings first and leave the pension untouched. A pot inherited after you turn 75 can be charged 40 percent and then income tax when it is drawn.

  Could go either way/anyone planning to leave money behind, above all an unspent pension pot