Number of pensioners paying tax soars: How to cut your bill

29 July 2017
Image

There has been a sharp rise in the number of pensioners having to pay tax, according to new figures, with over 6.39 million retired people still paying tax.

In the early 1990s, just one in nine taxpayers was aged over 65, that was 2.9 million people. Now an estimated one in five taxpayers is over 65, according to pension provider Royal London.

There are a number of reasons for this, firstly Britain has an ageing population, which means the number of pensioners is constantly rising and with it the number who have to pay tax.

The second reason is that pensioner incomes have been steadily rising, meaning more over 65s earn over the £11,500 personal allowance so they have to pay income tax.

Finally, the rapid recent increase in pensioner taxpayers is partly due to George Osborne’s freeze on pensioner tax-free allowances in the 2012 budget.

Up until 2012, a pensioner’s personal allowance – the amount they could earn before income tax was due – was higher than the rest of the population and it rose every year – typically by 4.75%. But in that year’s Budget the then-Chancellor George Osborne announced that the personal allowance for those that were already retired would no longer increase – until the normal personal allowance had caught up - and future pensioners would get the same personal allowance as the working population. This has meant a lot more pensioners have to pay income tax.

“It is striking just how many pensioners have been drawn into the tax bracket in recent decades,” says Steve Webb, director of policy at Royal London. “The number of over-65s paying tax has more than doubled since the early 1990s, and now one in five of all taxpayers is a pensioner.”

Keep your P60 safe for tax returns

To make matters worse for the over-65s this has meant a vast increase in how many of them have to fill out a tax return.

“It is clear that even retirement does not mean freedom from the misery of the annual tax return,” says Mr Webb. “It is shocking that over a quarter of a million people aged over 80 are still being asked to deal with this paperwork each year.”

If you are a taxpaying pensioner, keep an eye out for your P60 forms that are sent out by your pension providers at this time of year. You’ll need them to fill out your tax return so put them somewhere safe in order to make the process easier when you sit down to do your tax paperwork.

“The key to making the tax return as painless as possible is to keep good records, including carefully filing P60 forms and other information often supplied at this time of year,” says Mr Webb.

How to cut your retirement tax bill

There are a number of ways pensioners can keep their income tax bill to a minimum.

1. Be smart with pension withdrawals

With more and more pensioners taking advantage of the pension freedoms to withdraw money from their pension it pays to be smart about how much you withdraw.

Remember that you can take up to 25% of your pension tax-free. You could take that as a lump sum but it may be better to take it in smaller sums.

“If possible spread it over a number of years – large lump sum withdrawals can take you into a higher tax bracket whereas spreading the withdrawals can mean you pay less tax overall,” says Mr Webb.

2. Make the most of your personal allowance

This year the personal allowance is £11,500. If your income is below that you don’t pay any income. Your state pension, any earnings from work and private pensions all contribute towards your personal allowance.

Married couples and civil partners may be able to use the Marriage Allowance to reduce their income tax bill. If one of you earns less than £11,500 a year and the other earns between £11,501 and £45,000, the lower earner can move £1,500 of their personal allowance to their partner increasing their personal allowance.

3. Cut your income

“If you are still working past state pension age, think about deferring taking your state pension,” says Mr Webb. “If you draw a state pension while working it gets added to your wages and you get taxed at your highest marginal rate.

“If you defer taking your state pension you will get a higher rate when you do finally receive it and it is less likely to be taxed at a high rate if it is not being combined with earnings.”

4. Check your tax code

HMRC uses tax codes to tell pension firms and employers how much income tax they should deduct from your income. These tax codes can be wrong, meaning you could pay more tax than you need to. This is especially true where someone gets an income from multiple sources, such as several pensions.

Check your code and if you believe it is wrong tell HMRC. If you’ve been overpaying tax you can reclaim the extra tax going back four years.

5. Reclaim tax paid on lump sum pension withdrawals

Many people have used the pension freedoms to withdraw lump sums from their pension, but did you pay the right amount of tax on that withdrawal? You could find you overpaid and are due a refund.

Find out more with our guide to reclaiming tax on pension withdrawals.

Comments

Pensioners Tax

Pensioners on pension credit and attendance allowance have their rent and community tax , tv licence, dental charges. vouchers for glasses extra heating allowance etc paid for them . Those of us who have small company pensions and don't quality for pension credit not only have to pay for all of the above but are also taxed on incomes above £12.5k. It's time all benefits were taxed.

Add new comment