Why over-65s are at risk of tax on their wealth

Reaching the age of 65 signals the beginning of retirement for many, but it can also usher in a phase of tax headaches.

The number of over-65s paying income tax has risen by more than three million over the last five years, according to figures from HMRC.

Meanwhile, greater numbers of beneficiaries of estates face paying inheritance tax (IHT) as asset values rise and with unused pensions set to be included in estates from April 2027.

Try 6 free issues of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The number of over-65s paying tax on their savings interest is forecast to quadruple by the end of the 2026/27 tax year too, while 38% of people who paid capital gains tax (CGT) in 2024/25 were 65 or older.

However, there are ways those in their mid-60s can minimise the damage and keep the taxman at bay.

Income tax on state, personal and workplace pensions

An increasing number of pensioners are paying income tax on their pension wealth due to frozen tax thresholds.

The personal allowance has been frozen at £12,570 and higher rate income tax band at £50,270 since April 2024. Meanwhile, the additional rate tax band was cut from £150,000 to £125,140 from April 2023.

A recent Freedom of Information (FOI) request submitted by Steve Webb, former pensions minister and partner at pension consultants LCP, revealed hundreds of thousands of pensioners are being pulled into paying more tax due to these frozen thresholds – a process known as fiscal drag.

The FOI found those of state pension age, aged 66 and over, paying income tax at 40% or 45% has more than doubled from 494,000 since 2021/22 to 1,092,000.

The number paying tax at 45% has almost tripled from 39,000 to 115,000.

With income tax thresholds frozen until 2031, these figures are likely to rise higher.

Webb said: “Many people of working age may have expected that they would be basic rate taxpayers in retirement, but few will have expected to find themselves paying 40% or more out of their pensions in tax.

“But this is the norm now for over a million pensioners, with the number set to rise further.”

How to pay less income tax on your pensions

One way to avoid tipping your income into a higher tax band is to time when you make withdrawals from your pensions, Webb said.

For example, you could split a single large withdrawal into two and spread it across two tax years to keep your taxable income in those two years lower.

Another, Webb said, is by adding more into a pension after you’ve retired.

He explained: “It’s still possible to get tax relief on contributions up to age 75, which lowers current taxable income – especially in years when you would otherwise be a higher rate taxpayer.

“For those who have income to spare in retirement, additional pension saving can be worth considering.”

It’s worth noting, there are rules around how much tax relief you can receive on pension contributions if you have flexibly accessed your pension.

For example, the money purchase annual allowance applies to contributions if you’ve accessed taxable cash from a defined contribution pension. If the allowance is triggered, tax relief is usually limited to contributions of £10,000 a year gross.

Capital gains tax

Over-65s often take up a large share of CGT liabilities in the UK.

Data from HMRC reveals that of the 551,0000 people who paid CGT in 2024/25, 212,000 (38%) were aged 65 or older.

Sarah Coles, head of personal finance at investment platform AJ Bell, said: “People tend to build assets as they go through their working life, so wealth peaks around the age of 65, and at that point they start spending their way through their wealth. This period captures that turning point.”

How to lower your capital gains tax bill

Wherever possible, you should hold assets within tax-wrappered accounts like ISAs or pensions so any gains are free from CGT.

Make the most of your CGT annual allowance as well. This allows you to dispose of gains of up to £3,000 each tax year free from CGT.

Coles, from AJ Bell, said it’s worth making the most of your CGT annual allowance each year on an ongoing basis, so you can dump assets tax-free bit by bit.

Also, if your partner hasn’t used their annual CGT allowance or ISA allowance, you could transfer assets to them to pay less tax or even a lower rate of CGT.

Source: HMRC

Income tax on savings

Over-65s are increasingly paying income tax on savings held outside tax-wrappered accounts.

The number of savers in this age group paying income tax on their savings is forecast to reach 2.1 million in 2026/27, more than four times the 517,000 in 2022/23, according to Freedom of Information (FOI) figures obtained by Paragon Bank.

The total tax liability facing over-65s in 2026/27 is expected to reach £3.34 billion compared with £795 million in 2022/23, based on the FOI figures.

How to avoid paying tax on your savings

You could try overpaying on your mortgage if you’ve got surplus cash you don’t need to access immediately. You could also pay off any credit card bills or personal loans using money from your savings pot as well.

Make sure you’re putting savings into tax-wrapped ISAs as any interest earned on them will be tax-free.

Andrew Wright, head of savings at Paragon Bank, said using ISAs was particularly critical for those aged 65 and over, as new rules limiting the annual cash ISA limit to £12,000 from April 2027 won’t apply to this age group.

“Making full use of your ISA allowance can help protect more of your hard-earned interest from tax and those aged 65 plus have the benefit of retaining the full £20,000 cash ISA allowance from next tax year,” Wright said.

Inheritance tax

Frozen IHT thresholds and rising asset prices are dragging more and more estates into HMRC’s net, including those of over-65-year-olds.

IHT receipts in the three months to July 2026 totalled £3.2 billion, according to HMRC, £100 higher than over the same three month period in 2025, and they’re expected to climb more when unused pensions form part of people’s estates from April 2027.

Ian Dyall, head of estate planning at wealth manager Evelyn Partners, said: “It’s worth remembering that it’s not strictly the deceased estate-owner who pays inheritance tax but the beneficiaries.

“However, that doesn’t make it any more palatable to those who have carefully saved and invested, and who want to pass on that family wealth without a big tax charge.

“It’s also worth pointing out that as people are living longer, many beneficiaries are in their fifties or even sixties before they inherit from their parents – so it may well be the case that more 65-year-old beneficiaries are starting to face IHT bills.”

How to lower an inheritance tax bill

Start with making the most of your gifting allowances. For example, you can give away up to £3,000 tax-free each financial year to one or more people through the annual exemption rule.

You can also make regular gifts to people, as long as they’re made out of income and not capital and they don’t affect your standard of living.

This is known as ‘expenditure out of income’ and can include regularly paying rent for a child or adding money into an under-18’s savings account.

Gifts of any size can be made IHT-free if they are made seven years or more before your death.

Dyall said: “The earlier gifting is done the better as that gives the seven year rule more time to expire, which then means the gift will be fully outside the estate.”