Should I defer my State Pension to save on tax?
22 August 2025
Question by Francine
I’m in a dilemma. I probably earn £60,000 per year. I’m self-employed and work from a home office. I’m also 67 and collecting my State Pension. However, as it is added to my income, my tax bill is increased. I intend to work for another 7 years so should I defer my pension to save tax or would I ultimately lose out? What’s your best advice?
Answered by Toby Barklem
Hi Francine,
The State Pension is generally paid without any tax being deducted. What is likely happening is that the rest of your earnings are being pushed further into the higher-rate tax band.
Assuming you have a full State Pension, then £11,973 of your employed earnings are now paying 40% tax rather than 20% tax. The first thing to understand is that this still represents more money in your pocket, but a greater proportion goes to the taxman.
You could defer your State Pension; you would then receive a modest uplift when you finally took it. But a much more profitable tactic would probably be to pay your excess income into a private pension (or "SIPP"). This will save you the 40% tax entirely. You can do this up until age 75.
If you can afford to do so, I would pay in enough to entirely avoid any higher-rate tax, which would mean taking your earnings for the year (including the State Pension) to £50,270 or lower. The resulting sum will grow tax-free.
25% can be withdrawn free of tax and the remaining 75% in your pension will be taxable. But considering the numbers you have shared, it sounds like you would likely be a basic rate taxpayer in retirement.
Hope this is helpful.
Answered by
Toby Barklem
Principal and Chartered Financial Planner
In 2024, I established my own financial planning business to deliver bespoke services tailored to individual client needs. My areas of expertise include retirement planning, investment strategies, and estate planning. I pride myself on combining technical proficiency with a deep understanding of clients' unique financial goals.