When you retire, you probably look forward to being able to take it easy or to do what you want; whether that’s taking up new hobbies and activities or travelling to new places. In reality, retiring will involve a bit of form filling before you can take it easy. You’ll have to claim your state pension, work out how you want to take your company or private pension and make sure you’re paying the right tax.
Your tax allowance
Until you’re 65, you’re entitled to earn or receive up to £11,000 in income (for the year 2016-17) without paying tax on it.
SAVVY TIP: The amount you can receive before you pay tax (the personal allowance) changes every year. The Gov.uk website has up-to-date information on personal tax allowances.
What is taxable and what isn’t?
Not all income you receive is taxable, and not all of it will be taxed at source. For example:
- State pension: this is taxable, but not taxed at source. If you only receive the basic state pension you won’t pay any tax on it, because it is worth less than the personal allowance.
SAVVY TIP: If you receive the basic state pension and an additional state pension through SERPS or the state second pension and it’s more than your tax allowance, you’ll have to fill in a self assessment form and pay tax by January 31st. You can find information on registering for self assessment on the gov.uk website.
- Workplace or private pensions: these are taxable (except for the lump sum you’re allowed to take of up to 25% of the pension’s value). If you receive a pension from your workplace, you take money directly out of the fund or you convert your pension fund into a regular income, perhaps by buying an annuity, you pay tax on the money you take out of your pension or on the income.
- Income from working, whether you’re employed or working on a self employed basis.
- Interest from savings accounts. Since April 2016, all basic rate taxpayers have a personal savings allowance of up to £1,000 a year. That means you can receive up to £1,000 a year in interest from ordinary savings accounts. If you’re a 40% taxpayer, the amount reduces to £500.
SAVVY TIP: If you have money in some National Savings & Investments’ products or in a cash ISA, you don’t have to pay tax on the interest, no matter how much you receive.
- Dividends: you can receive up to £5,000 a year in dividend income but you have to pay tax on income you receive from share based investments above this £5,000 level, unless they’re held in an ISA.
SAVVY TIP: The Gov.uk website has a full list of the income that is taxable and income that’s tax free. Tax free income includes Pension Credit, Cold Weather Payments and Attendance Allowance.
The age-related allowance
When you reach 65, you used to be able to keep more of your income, but, for those reaching 65 after April 5th 2013, they had no entitlement to an age-related allowance. However, those who had already reached 65 are able to keep theirs, although the levels have been frozen:
– If you’re aged 65-74 you can receive up to £10,500 without paying tax. If you receive more than £25,400 you start to lose the age related allowance.
– If you’re aged 75+ you can receive up to £10,660 without paying tax. If you receive more than £25,400 you start to lose the age related allowance.
– You lose the age related allowance above the upper threshold at the rate of £1 for every £2 of taxable income you get. So, if you’re 67 and receive £26,000 in income, which is £600 above the upper threshold, your age related allowance of £10,500 would be reduced by £300 (half of the £600 excess).
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