Do you have to pay tax in retirement?

When you reach State Pension age you no longer pay National Insurance contributions, but you don’t automatically stop paying Income Tax.  If your taxable income – including your pension – is more than your tax-free allowances you’re still a taxpayer.

HM Revenue & Customs (HMRC) may have already contacted you to help you work out if you should be paying tax at State Pension age. You may have received a ‘Pension Coding form’ (P161). It’s important that you fill this in for HMRC’s information so that you pay the right tax and get your age-related allowances.

To work out if you are a taxpayer follow these three steps:

1) Add up all your taxable income

• all pension income (including State Pension)
• employment/self-employment income if you keep working
• almost all bank and building society interest (the ‘gross’ amount, before tax is taken off)
• dividends (income from shares)
• income from property after expenses but not the first £4,250 if you rent out a room in your house
• income from abroad (overseas pensions have a 10 percent deduction so you are only taxed on 90 per cent of the total amount)
• some benefits, including Carer’s Allowance and, in some cases, Incapacity Benefit

2) Work out your tax-free allowances

3) Take your tax-free allowances away from your taxable income

If your taxable income is more than your tax-free allowances, you’re a taxpayer and must contact HMRC. If your tax-free allowances are the same as or more than your taxable income, no action is necessary. If you think that you shouldn’t be paying tax but are, you’ll be able to claim a refund.

Notes

If you are married or in a civil partnership and have income from savings, investments or property held in joint names you’re usually treated as getting half the income each. So you only have to pay tax on your half. If you’re not married, or in a civil partnership, you count only your share of joint income.

If you’re not married, or in a civil partnership, you count only your share of joint income.

Non-taxable income

Income that’s never taxed includes:

• Pension Credit
• Working Tax Credit or Child Tax Credit
• income or interest from an Individual Savings Account (ISA), interest from National Savings Certificates
• interest and bonuses from a Save As You Earn (SAYE) scheme
• Premium Bond and National Lottery winnings
• certain benefits, including Cold Weather Payments, Attendance Allowance, Income Support and Disability Living Allowance
• lump sum pension payments (but not lump sums from deferring a State Pension or foreign pensions)

Blind Person’s Allowance

If you are certified blind and are on a local register of blind persons, or if you live in Scotland or Northern Ireland and you are unable to perform any work for which eyesight is essential you can claim Blind Person’s Allowance. Like your Personal Allowance, this is an amount of income you can get without paying tax. For 2011-2012 the allowance is £1,980.

Bear in mind that you may qualify for other allowances such as Married Couple’s Allowance and Maintenance Payments Relief that can reduce your tax bill.

Any further questions regarding tax planning?

If you need tax help or tax advice, contact an independent financial adviser.  You can call us on: 01582 839280 or email us if you’d prefer.