The Tax-Free Income Stack: How to Draw Over £19,000 From Your Pension and Savings With No Tax to Pay

Ask most people how to pay less tax in retirement and they will talk about their 25% tax-free lump sum. It is a valuable perk, but it is only one piece of the puzzle. The bigger opportunity, and the one almost nobody plans around, is the stack of tax-free allowances that sit quietly in the income tax system. Used together, they can let you draw a meaningful income from your pension, savings and investments without handing a penny to HMRC.

In the 2026/27 tax year, a single person can realise more than £19,000 of income with no tax to pay, and a couple can roughly double that, before you even count ISA withdrawals or tax-free cash. This article walks through how this tax-free income stack works, the one rule that makes or breaks it, and how to structure your drawdown to take advantage of it.

The building blocks: your tax-free allowances in 2026/27

Think of your tax-free income as a stack of separate allowances, each covering a different type of income. For 2026/27 the layers are:

• Personal Allowance — £12,570. The slice of income you can receive before any income tax applies. It covers pension income, earnings and most other non-savings, non-dividend income.
• Starting rate for savings — up to £5,000 at 0%. A separate 0% band for savings interest, frozen at £5,000 until at least 2030/31. There is a catch we will come to.
• Personal Savings Allowance — £1,000. A further £1,000 of savings interest tax-free for basic-rate taxpayers (£500 for higher-rate, nothing for additional-rate).
• Dividend allowance — £500. The first £500 of dividend income each year, tax-free.
• ISA income — unlimited and always tax-free. Interest, dividends and gains inside an ISA never appear on your tax return.
• 25% tax-free cash. Up to a quarter of your pension can usually be taken tax-free (subject to the £268,275 lump sum allowance), entirely outside the income tax system.

How the stack fits together: a worked example

Imagine Margaret, 62, who has retired a few years before her State Pension starts. She wants a tax-efficient income. Here is how the stack could look for her in 2026/27:

• £12,570 drawn as taxable pension income, covered by her Personal Allowance. Tax: £0.
• £5,000 of savings interest, covered by the starting rate for savings. Tax: £0.
• £1,000 of savings interest, covered by her Personal Savings Allowance. Tax: £0.
• £500 of dividends, covered by the dividend allowance. Tax: £0.

That is £19,070 of income with no tax to pay. If Margaret also withdraws, say, £6,000 from a Stocks and Shares ISA and tops up with part of her 25% tax-free cash, her total tax-free income comfortably clears £25,000, all without troubling HMRC.

The one rule that makes or breaks it

The starting rate for savings is the part people get wrong. The £5,000 band is reduced by £1 for every £1 of non-savings income (such as pension or earnings) above your Personal Allowance. In plain terms: the full £5,000 is only available if your pension and earned income is at or below £12,570.

Draw £12,570 of pension income and the £5,000 savings band stays fully intact. Draw £17,570 or more and it disappears entirely. This is why drawing your pension income up to, but not beyond, the Personal Allowance is so powerful: it preserves the savings band sitting above it.

Where the State Pension fits in

There is an important wrinkle for anyone over State Pension Age. The full new State Pension is £12,548 in 2026/27, almost exactly the Personal Allowance. Once it starts, it uses up nearly all of your tax-free Personal Allowance on its own, leaving very little room to draw pension income at 0%.

That makes the years before your State Pension begins, typically your sixties up to State Pension Age of 67, a golden window. With no State Pension yet in payment, your entire Personal Allowance is free to soak up drawdown income tax-free. Many people use these years to draw down harder from their pension while their tax-free allowances are wide open, easing the tax burden later in retirement.

Doubling it up: how couples can draw close to £40,000 tax-free

Allowances are individual, so a couple has two of everything. If both partners structure their income around the stack, two Personal Allowances, two savings bands and two dividend allowances add up to roughly £38,140 of tax-free income between them, before ISAs and tax-free cash are even counted.

The practical lesson is to make sure income and assets are shared sensibly between you, rather than concentrated in a single name where allowances go to waste. Our guide to how couples should coordinate pension drawdown goes into this in more detail.

The catch: the right money in the right place

The stack only works if you actually have the right types of income to fill each layer. Drawing £5,000 of savings interest, for instance, means holding enough outside an ISA to generate it. At around 4.5%, that is roughly £110,000 of cash or fixed-interest savings. Few retirees will fill every band to the brim, and that is fine. The point is to use the framework to decide where to hold your money:

• Hold some savings outside an ISA if your interest is comfortably within the starting rate and Personal Savings Allowance. There is no tax benefit to tying up ISA space on interest you could receive tax-free anyway.
• Use ISAs for income that would otherwise be taxed, such as larger interest, dividends above £500, or capital gains.
• Mind the 2027 ISA change. From 6 April 2027 the cash ISA limit falls to £12,000 for under-65s, while those aged 65 and over keep the full £20,000 cash ISA allowance, a quirk worth knowing if you are approaching that age.

Putting it into practice

You do not need to be wealthy to benefit, but you do need to be deliberate. A few practical steps:

1. Set your taxable pension withdrawal with the Personal Allowance in mind. Drawing around £12,570 a year (less any State Pension already in payment) keeps that income tax-free and protects your savings band.
2. Top up from ISAs and tax-free cash. These do not count as taxable income, so they lift your spending power without using up any allowance.
3. Spread savings and investments across both partners so you use two full sets of allowances rather than one.
4. Review it every year. Interest rates, your State Pension and frozen thresholds all shift the maths over time.

You can model different withdrawal levels and see the tax impact using our pension drawdown calculator, or map out your whole retirement income with the retirement planner.

Key takeaways

• In 2026/27, the Personal Allowance (£12,570), starting rate for savings (£5,000), Personal Savings Allowance (£1,000) and dividend allowance (£500) can deliver £19,070 of tax-free income for one person.
• The £5,000 savings band only survives in full if your pension and earned income stays at or below £12,570, so drawing to, but not beyond, the Personal Allowance is key.
• The full new State Pension (£12,548) all but uses up your Personal Allowance, making the years before State Pension Age a prime window for tax-free drawdown.
• Couples have two of every allowance, roughly £38,000 of tax-free income between them, before ISAs and tax-free cash.
• ISA withdrawals and 25% tax-free cash sit outside the income tax system entirely and can be layered on top.

Tax positions differ from person to person, and the order in which income is taxed can become complex once savings, dividends and the State Pension are combined. This article is general information, not personalised advice, and it is worth speaking to a qualified financial adviser or tax specialist before restructuring your income. You can also compare drawdown providers to make sure the plan you hold gives you the flexibility to draw income in the tax-efficient way described here.