Don’t think that just because you have retired you won’t pay tax – no one gets off that lightly.
For a start, you’ll pay Council Tax if you own or rent your home, although you could be entitled to a discount if you or someone you live with is disabled and must live in a modified property, or if you are a sole occupant.
But what about income tax?
When most of us think about tax, it’s income tax that springs to mind. It’s easy to slip into thinking that this is just imposed on earnings. In fact, it covers income from the State and any private pensions you have, as well as investments, property, savings and certain benefits, such as Pension Benefit. The good news is lump sums taken from your pension pot won’t attract tax on the first 25%.
Six taxes you can legally avoid.
What is my personal allowance?
Tax is imposed on any income above your tax-free personal allowance, which in 2015/16 will be £10,600 for anyone born after 5 April 1938 or with an income of more than £100,000, currently.
If you were born before 6 April 1948 your personal allowance is £10,600 on income up to £27,000. Anyone born before 6 April 1938 has a personal allowance of £10,660 for earnings of up to £27,000. These amounts are adjusted each year.
You can expect to pay 20% of income received on any amount above your personal allowance up to £42,385. Income between £42,386 and £150,000 will attract the higher rate of tax, which is 40%. There is an additional rate of tax, of 45% on income over £150,000.
The personal allowance goes down by £1 for every £2 if your adjusted net income is more than £100,000, meaning your allowance is zero if your income is higher than £120,000.
Savings interest and tax
While interest earned on taxable savings accounts is automatically taxed at 20%, you may be able to get this paid tax-free or claim back any tax paid. You’d be entitled to a full refund if your total income is less than your personal allowance. Ask your account provider to not deduct any tax by submitting a completed R85 form.
If your taxable income is between £10,000 and £13,540 – not including savings interest – you may only need to pay tax at 10% on interest earned, rather than the standard 20%. If you think you’re owed tax back on savings, complete form R40 and send it to HMRC.
Thankfully, no tax is payable on certain savings products, including Individual Savings Accounts (ISAs) and certain National Savings and Investments products, such as Premium Bonds and Savings Certificates.
How to reduce inheritance tax.
Married Couple’s Allowance
You can apply for Married Couple’s Allowance by filling in a Self Assessment tax return each year. You must you live with your spouse or civil partner and at least one of you must have been born before 6 April 1935.
Note that if you are separated through illness or work, training or education, you can still apply and will receive the allowance. Successful applications could see your income tax bill drop by £314 to £816.50 a year.
If you marry within the tax year, you’ll receive an allowance based on the proportion of the year you were married or in your civil partnership. The allowance runs for each tax year, when a fresh application must be made. If one of you dies, payments continue until the end of the tax year.
Blind Person’s Allowance
The Blind Person’s Allowance is a fixed amount that is added to your Personal Allowance, so you can earn more each year before you start to pay income tax. Anyone living in England or Wales who is registered blind or severely partially sighted can apply, while applicants in Scotland or Northern Ireland who can’t undertake work that requires eyesight can also apply to HMRC for this Allowance.
Currently the annual Allowance is £2,230. If both you and your spouse or civil partner are blind, you can each receive the Allowance – and should either claimant not pay tax or earn enough to make use of it, their Allowance can be transfer to their partner.
Five things you might need to pay tax on.
A word on National Insurance and benefits
Unlike income tax, National Insurance contributions stop when you reach State Pension age. However, certain benefits, including Pension Credits, are available. For more information see our guide to retirement-related benefits.