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%.
What is my personal allowance?
Your tax-free personal allowance is currently £12,500, with basic rate tax payable between that figure and up to £50,000. If you earn £50,000, that’s when the higher rate 40 per cent tax kicks in.
There’s good news for those fortunate enough to earn £100,000 or above. In this case, the tax-free personal allowance goes down by £1 for every £2 earned above £100,000. The 45 per cent income tax additional rate applies to people earning £150,000 or more.
Savings, investments and income tax refunds
You could be eligible to claim a refund of the income tax deducted from savings and investments.
The way to apply for a repayment of tax on your savings interest – so long as you don’t complete a self-assessment tax return – involves filling in an R40 form and sending it to HMRC.
Happily 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.
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 between £345 and £891.50 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.
If you and your partner were born on or after 6 April 1935, you could instead find yourself eligible to claim marriage allowance. In this case, you can transfer £1,250 of your personal allowance to your husband, wife or civil partner.
Blind person’s allowance
The blind person’s allowance is a fixed amount added to your personal allowance, so you can earn more each year before you start paying 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 £2,450. 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 transferred to their partner.
And a quick 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.