How to pay less tax: pensioners

Published by Sam Barrett on 21 March 2011.
Last updated on 08 May 2013

Old couple with bills

With the country in the grip of austerity measures, you can be sure that most of us will see our tax bills continue to rise in the coming year. But, while some of it's unavoidable, there are steps you can take to ensure you don't hand over more than you need to.

Simply refusing to pay tax isn't possible without breaking the law, but figures from professional advice website unbiased.co.uk show we're wasting billions of pounds in unnecessary tax.

This includes £2.6 billion in tax relief basic-rate taxpayers are missing out on by not saving into a pension and the £1.4 billion down the drain because we're not being ISA efficient with our savings. 

The third of our four scenarios shows pensioners how to keep as much of your money as possible in your pocket and out of the taxman's clutches.

Case study: a pensioner worried about inheritance tax

Widow Cecilia Jones (73) is worried about inheritance tax. She lives in a house worth £400,000 and has assets worth a further £300,000. She can use her late husband's nil rate band, giving her a total allowance of £650,000, so provided nothing changes, she stands to leave an IHT liability of £20,000 (40% of £50,000).

Cecilia's solution

Some forward planning will get rid of Cecilia's £20,000 IHT liability. Lawless recommends she uses the IHT exemptions. "You can give away up to £3,000 a year and it's immediately outside your estate. On top of this, you can give away as many gifts worth up to £250 as you like to different people," he explains.

Cecilia can also take advantage of a couple of other exemptions. Her grandson is getting married in September and she plans to give him £2,500 as a gift.

She also receives a small pension of £200 a month from a former employer. As she lives off the pension from her late husband's employer, she has decided to take advantage of the exemption relating to gifts out of normal expenditure, redirecting the money to her two youngest granddaughters to stop her estate growing further.

These steps, repeated as often as possible, will help to reduce her estate below the nil rate band.

"It's important for Cecilia to keep an eye on this," says Lawless. "Legislation and the value of assets can change, making it necessary to bring in additional forms of planning."

If the value of Cecilia's estate increased significantly, she could consider a trust. Lawless says this can be useful, but cautions against putting more than the £325,000 nil rate band into one as this would trigger an immediate IHT charge at 20%.

"Life insurance is another option, but she should write it in trust so the benefits are paid directly to her beneficiary rather than into her estate," he adds. 

Getting the basics right

While complex planning can save you thousands in tax, it's also worth paying attention to the basics, such as your tax code and tax credits. This guide will help you get the basics right.

  • Check your tax code by looking at your pay slip or asking your tax office for a coding notice. This will detail your allowances and any deductions due to state benefits or taxable employee benefits.

If it doesn't look right, query it - any errors will affect how much you pay or potentially result in a large tax demand if you're paying too little.

Given the size of most of our tax bills, it's probably no surprise that some of us pay too much. This can happen if you change jobs and your correct tax code isn't used, or if you have more than one job.

If the overpayment relates to the current tax year, contact your tax office as it'll be able to adjust your tax code. If an overpayment relates to a previous year, write to your tax office with your P60 and details of your income. You can claim back overpaid tax for up to four years. 

  • You can also pay too much tax on your savings as tax on interest is deducted at source. If this has happened, complete a form R40 Tax Repayment Form for each year you've paid too much. A form R85 from your building society or bank will stop future interest being taxed.
  • Another basic that can affect your overall financial position is tax credits. Many families with children are entitled to tax credits and any pensioner receiving less than £145.40 a week (£222.05 for couples) can get pension credit. A benefit-checker such as that provided by Turn2us can help you claim your entitlement (turn2us.org.uk).

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