How to Limit Taxation After Retirement

Many of us look forward to retirement and hope that we can be financially secure by the time we finish working for good. Careful planning helps but being aware that taxation can continue even past retirement is important if you are going to organise your finances properly. Here, we take a look at the issue of taxation after retirement a little closer.

Income tax

Many people do not realise that you will continue to be liable for income tax after you retire. You may not be receiving a salary any more, but many of you will receive a pension income. Although the State Pension is paid tax-free, this is only the case because it is under your Personal Allowance. You will pay tax on income received from a personal or workplace pensions once you exceed this Personal Allowance. The Personal Allowance for most people is £12,500 tax-free as of April 2019. You will also be able to withdraw 25 per cent of your pension pot tax-free in most cases.

Did you know you can now apply for a State Pension Forecast by filling in this form. This will provide you with an estimate of how much state pension you will receive, together with the date from which you can claim. Or if you know your Government Gateway login, you find out immediately online here.

For those receiving larger pension payouts, income tax is payable at the normal rates on anything over their personal allowance.

Savings and investments

Your income from savings and investments may be taxed, so it’s important to try to limit your exposure by making the most of tax-free savings products. You can invest £20,000 per year into a Cash ISA completely tax-free.

Interest on other savings is taxed, but each of us has a Personal Savings Allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. This is the amount of interest from your savings you can receive each year tax-free.

Annoyingly, you used to be able to opt into receiving your savings income with the tax already taken off by filling in the R85 form, but this is now not the case. However, if you have previously done so, you will continue to receive your interest this way. For the rest of us with savings income over £1,000, HMRC collects the tax through our PAYE code.

Capital gains tax is payable on investment income, so bear this in mind when investing in the first place. Speaking to a good IFA about tax-efficient savings and investments can help to reduce your tax liability.

Inheritance tax

We can’t talk about retirement tax without touching on inheritance tax. Changes have been made recently to inheritance tax rules, which will scrap the tax completely for couples passing on their property up to the value of £1m from the 2020/2021 tax year.

This is being brought in through a new Main Residence Allowance, which will increase in increments over the coming years until it reaches £175,000 per person in 2020. This can be added to the existing £325,000 inheritance tax allowance to total £500,000 per person, hence the £1M per couple.

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