Avoiding pitfalls as pensioners pay more than £24 billion in tax

2nd August 2018

In 2015/16, 6.87 million pensioners paid an average of £3,522 each, in tax, according to Royal London.

That’s a total of more than £24 billion.

What affects the amount of tax you pay?

According to the research, men are likely to face higher tax bills in retirement than women, though this is likely due to the fact that, on average, men have a higher retirement income than their female counterparts. The average amount paid in tax by male pensioners in 2015/16 was £4,341, while women paid an average of £2,467. That might be less, but it’s still a lot to lose to the tax man each year.

Location also plays a big part in the amount of tax paid. The 10 places with the highest average tax bill in 2015/16 were:

  • Kensington & Chelsea £32,250
  • Westminster £28,938
  • Camden £18,692
  • Epping Forest £14,133
  • South Bucks £14,111
  • Barnet £9,606
  • Elmbridge £9,500
  • Hammersmith and Fulham £8,462
  • Mole Valley £8,000
  • Cotswolds £7,769

It’s perhaps not surprising that the tops spots are filled by places in London, where the overall cost of living and personal expenditure tend to be higher.

At the other end of the scale, the lowest average tax bills were found in:

  • Redcar & Cleveland £1,737
  • Sunderland £1,727
  • Coventry £1,700
  • Blackpool Unitary Authority£1,667
  • Sandwell £1,667
  • East Ayrshire £1,667
  • Kingston upon Hull UA £1,444
  • Blaenau Gwent £1,286
  • Stockton-on-Tees Unitary Authority £1,192
  • Stoke-on-Trent Unitary Authority £1,192

Steve Webb, Director of Policy at Royal London, comments: “Many people might assume that once you retire you cease to be of interest to the taxman.  But these figures show that this is very far from being the truth.  The number of taxpaying pensioners has nearly doubled in the last two decades.

“With talk of also requiring pensioners to pay National Insurance on any earnings or even pensions, the older population may start thinking of themselves as ‘Generation still taxed’.”

What can you do?

If you’re already retired, and want to reduce tax, here are our six top tips to do so:

  1. Only take the income you need: If you are using Flexi-Access Drawdown to access your pension fund, withdrawing only the income you need rather than what you can take out will keep your tax bill to a minimum. Recent research from the Financial Conduct Authority (FCA) shows that large numbers of people are using Pension Freedoms to withdraw their entire fund in one go.While some may need that capital, many others are simply taking the money out to put into a savings account, which may result in a large and unnecessary tax bill. Therefore, you should only take what you need if you wish to keep bills to a minimum.
  1. Create income with tax-free cash: If you don’t need to take the tax-free lump sum (usually up to 25% of the value of your pension) you could use it to make up any shortfall in income before accessing the rest of your fund, which will be subject to potential tax. In other words, just because it is called a ‘tax-free lump sum’, doesn’t mean it has to be taken as one. You could use it to provide tax-free income, to supplement other sources, instead.
  1. Make the most of tax-efficient products: Each year, you can save up to £20,000 in an ISA (Individual Savings Account), and any growth within the Personal Saving Allowance (currently £1,000 per year) will not attract tax. You will not be taxed when making withdrawals from an ISA.
  1. Know your tax allowances: To make the most of the options available, you need to understand them. There are two key tax allowances which could reduce the bills you face each year, including:
  • The Personal Savings Allowance
  • Married Couples Allowance/Marriage AllowanceIt is important that you understand these and find out if you are eligible to benefit from them. However, they can be quite complex, so why not talk to us for a tailored explanation?
  1. Understand Capital Gains Tax (CGT) rules: The annual CGT allowance allows everyone to realise a gain of £11,700 each year without tax. This is often forgotten but can be a very useful way of reducing tax.
  1. Plan for future taxes on your estate: It’s not the happiest of subjects, but there may be tax due on your estate when you die. This is known as Inheritance Tax (IHT) and is paid by beneficiaries if they receive part of an estate worth more than £325,000 (or £650,000 if you are the remaining partner and have used your late spouse’s allowance as well). There are many ways you can reduce the value of your estate before passing away and ensure that your loved ones are able to fully benefit from whatever you leave behind for them.

To discuss more ways to control the tax payable in retirement and beyond, please feel free to get in touch with us.