Why people over 65 may be subject to wealth taxes

Retirees' wealth and income are quadrupled, but there are ways to mitigate the impact of taxes

For many people, turning 65 marks the start of retirement, but it can also bring with it a period of tax difficulties.

According to data from HMRC, the number of people over 65 who pay income tax has increased by more than three million over the past five years.

In the meantime, as asset values increase and unused pensions are scheduled to be included in estates starting in April 2027, more beneficiaries of estates will have to pay inheritance tax (IHT).

While 38% of those who paid capital gains tax (CGT) in 2024-2025 were 65 or older, the number of over-65s paying tax on their savings interest is also increasing.

But there are ways for people in their mid-60s to minimize the damage and deter the taxi driver. Watch the full video here.

State, individual, and employer-sponsored income taxes.

Because of frozen tax thresholds, a growing number of retirees are paying income tax on their pension assets.

Since April 2024, the personal allowance and higher rate income tax band have been set at 12,570 and 50,270, respectively. As of April 2023, the additional rate tax band was reduced from 150,000 to 125,140.

According to a recent Freedom of Information (FOI) request made by Steve Webb, a former pensions minister and partner at pension consultants LCP, these frozen thresholds are forcing hundreds of thousands of pensioners to pay higher taxesa process known as fiscal drag.

According to the FOI, the number of people 66 years of age and older who pay income tax at 40 percent or 45 percent has more than doubled from 494,000 in 2021-2022 to 1,092,000.

The number of people paying 45% tax has nearly tripled, from 39,000 to 115,000.

Since income tax thresholds are set at 2031, these numbers are probably going to increase.

"Many people of working age may have anticipated that they would be basic rate taxpayers in retirement, but few will have anticipated finding themselves paying 40 percent or more out of their pensions in tax," Webb stated.

However, for more than a million seniors, this is now the standard, and the number is expected to increase."

How to reduce your pension income tax.

Timing your pension withdrawals is one way to prevent your income from falling into a higher tax band, according to Webb.

To reduce your taxable income in those two years, you could, for instance, divide a single large withdrawal into two and distribute it over two tax years.

Webb added that increasing your pension after you've retired is another.

"Contributions up to age 75 are still eligible for tax relief, which reduces current taxable income, particularly in years when you would otherwise be a higher rate taxpayer," he clarified.

"Additional pension savings may be worthwhile for those who have extra money in retirement."

It's important to remember that if you have flexibly accessed your pension, there are restrictions on the amount of tax relief you can get on your contributions.

For instance, if you have accessed taxable cash from a defined contribution pension, you are eligible for the money purchase annual allowance. Tax relief is typically restricted to contributions of £10,000 gross per year if the allowance is activated.

Gains tax on capital.

In the UK, a significant portion of CGT liabilities are frequently borne by those over 65.

According to HMRC data, 212,000 (38%) of the 551,0000 individuals who paid CGT in 2024-2025 were 65 years of age or older.

"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," stated Sarah Coles, head of personal finance at investment platform AJ Bell. That turning point is captured in this time frame."

How to reduce the amount of capital gains tax you pay.

To avoid paying CGT on any gains, you should, whenever feasible, keep assets in tax-wrappered accounts like ISAs or pensions.

Utilize your CGT annual allowance to the fullest. As a result, gains of up to £3,000 can be disposed of tax-free each tax year.

According to Coles from AJ Bell, it's worthwhile to consistently maximize your CGT annual allowance so that you can gradually sell assets tax-free.

Additionally, you could transfer assets to your partner to pay less tax or even a lower rate of CGT if they haven't used their annual CGT allowance or ISA allowance.

To scroll horizontally, swipe. Source: HMRC.

Income tax on savings.

Income tax on savings held outside of tax-wrappered accounts is becoming more and more common among over-65s.

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

According to FOI data, the total tax liability for individuals over 65 in 2026-2027 is predicted to be 3.34 billion, up from 795 million in 2022-2023.

Ways to keep your savings tax-free.

If you have extra money that you don't need right away, you might consider overpaying on your mortgage. Additionally, you could use funds from your savings account to settle any personal loans or credit card bills.

Because interest earned on tax-wrapped ISAs is tax-free, make sure you are investing in them.

Using ISAs is especially important for people 65 and older, according to Andrew Wright, head of savings at Paragon Bank, since new regulations capping the annual cash ISA limit at £12,000 starting in April 2027 won't apply to this age group.

"Those over 65 have the advantage of keeping the full 20,000 cash ISA allowance from next tax year, and making full use of your ISA allowance can help protect more of your hard-earned interest from tax," Wright stated.

Inheritance taxes.

An increasing number of estates, including those of people over 65, are being drawn into HMRC's net due to frozen IHT thresholds and rising asset prices.

According to HMRC, IHT receipts for the three months ending in July 2026 totaled £3.2 billion, which is 100 more than for the same period in 2025. This amount is predicted to increase further when unused pensions are included in people's estates starting in April 2027.

Ian Dyall, head of estate planning at wealth management firm Evelyn Partners, stated: "It's important to keep in mind that beneficiaries, not just the deceased estate owner, are responsible for paying inheritance tax.

That doesn't, however, make it any more appealing to people who have invested and saved carefully and who wish to transfer that family wealth without incurring a significant tax burden.

It's also important to note that as people live longer, many beneficiaries are in their fifties or even sixties before they inherit from their parents, so it's possible that more beneficiaries who are 65 years of age or older are beginning to have IHT bills."

How to reduce the amount of inheritance tax.

Make the most of your gift allowances first. For instance, the annual exemption rule allows you to donate up to £3,000 tax-free each fiscal year to one or more recipients.

As long as they don't lower your standard of living and are funded by income rather than capital, you can also regularly give gifts to other people.

This is referred to as expenditure out of income and can include funding an under-18's savings account or routinely paying a child's rent.

If they are made seven years or more prior to your passing, gifts of any size are exempt from IHT.

According to Dyall, giving a gift earlier is preferable because it gives the seven-year rule more time to expire, which means the gift will be completely outside the estate."