‘My income will balloon to over £100k with the state pension. How can I cut my tax bill?'

Telegraph

30-06-2025

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Dear Charlene,
I'm hoping you can provide me with some guidance, but please keep my identity anonymous.
I'm 65 years old and approaching my state pension retirement age in December 2025.
I'm still working, and currently earn £82,000 a year. I also have a private pension, which pays me £11,000 a year. To avoid the higher tax rate of 40pc tax, I pay £44,000 of my salary a year into my pension.
I hope to keep working for a few more years, possibly until I'm 70.
In December, I will start to receive my state pension, it will be around the full amount of £11,900 a year. I've heard I can defer my state pension payments for as long as I want to avoid paying too much tax again, is this a wise decision?
Many thanks,
– Anon
Dear reader,
You currently receive income of around £93,000 a year before tax, putting you firmly in the higher-rate (40pc) tax bracket before any pension contributions.
As you've mentioned, pension tax relief can help reduce your taxable income to move down a tax band. The basic-rate tax band is up to £50,270 per year. Assuming the £44,000 contribution figure you mention is the gross figure that is going into your pension, this would reduce your taxable income to £49,000 a year.
It's not clear in what form you currently receive your private pension, but given that you haven't suggested reducing it, we'll assume that it's not drawdown. This is important, because people who take income using (flexi-access) drawdown will trigger something called the money purchase annual allowance (MPAA).
This is a reduced annual allowance of £10,000 a year for money purchase pensions (such as Sipps and personal pensions), and it covers the total gross contributions made by you and any employer to all these pension types in a tax year.
You cannot carry forward unused money purchase annual allowance. If the MPAA applies to you, your pension provider (paying your income) should have written to you within 30 days of you triggering it. If you're not sure whether you have triggered it or not, please speak to your provider, and also consider engaging a financial adviser.
Now on to the question about deferring the state pension. As you know, it's paid without tax being deducted, but counts as total taxable income. If you claimed yours and continue to work, your income would be almost £105,000 a year, or £61,000 if you continued making pension contributions of £44,000 gross.
If these continued, you would pay 40pc tax on £10,630 of your other earned income from your salary and pension in payment. Your income would rise by about £6,632 after income tax, but it's worth noting that you'll no longer pay employee National Insurance contributions on your salary, which could mean an extra £3,000 a year in your pocket too.
To defer your state pension, you could simply not claim it and get a higher amount later. You'll get an increase of 1pc for every nine weeks that you defer, which is as an increase of around 5.77pc for each year of deferral. If you deferred for a whole year, you'd miss out on £11,900 for that year (around £6,632 after tax), but get around £690 extra a year when you do claim.
The extra cash on offer for deferral is far less generous than it was under the old system. It's generally said you'll need to live another 20 years after claiming your state pension to recoup the income you deferred via the increases. This is the average life expectancy for a man of your age today.
If you're in good health and expect to live for more than another 20 years, then your current income means it's likely that the extra tax you'd pay now by claiming could make some deferral worth it. It's also worth mentioning that although you'll benefit from the triple lock on most of your state pension, it won't apply to any extra amount you earn for deferral.
The other option – assuming you have not triggered the money purchase annual allowance – is to claim your state pension, but increase your other pension contributions slightly. You can do this as you are still working and earning a salary. This isn't usually an option for people who are no longer earning, due to the tax relief rules.
You'd need to pay in around £10,630 gross to move back out of 40pc tax – or £8,504 into a scheme like a Sipp that claims some tax relief for you automatically. You might even find the extra contributions you make achieve a higher return than the deferral rate if you invest them.
If you do decide you want your state pension, you must claim it, as it isn't paid automatically when you turn 66. You'll need some personal details, including an invitation code from your government letter inviting you to claim. You should get this letter in October, based on your December birthday.
I appreciate there is a lot to take in, but hopefully this gives you some help towards your decision on whether to defer or not.
With best wishes,
– Charlene