I'm retired but working short term, how can I pay less tax?

4 September 2014

Q

I am 68 and have both the state and a company pension. I have recently started a short-term job, which will run between 18 and 24 months. Because of this, I will be earning £45,000 a year and my existing pensions will take me into the 40% tax band. I am wondering what are my options to reduce the tax burden on these new earnings? A self-invested personal pension (Sipp) comes to mind but I'm not sure if that is the ideal path to follow. A New Isa (Nisa) is straightforward but is an 'after-tax' option. What would you suggest?
From
CS/Elgin

A

The right solution for you will depend on your circumstances and what it is you want to achieve. What is the most important for you - is it tax efficiency or flexibility?

The good news to start with is because you're over the state pension age, you don't have to pay any National Insurance contributions on your earnings. This makes your earnings more tax efficient than they would be for younger workers.

You can invest in a pension, although it doesn't necessarily have to be a Sipp. As a starting point, you should see if your employer provides a pension scheme and if so whether it will also pay into it on your behalf.

With a pension, you will benefit from initial income tax relief at your marginal rate on your contributions, which sounds like it will be 40% for you. New pension rules also mean you might be able to benefit from extra flexibility in terms of how you take your benefits.

However you plan to take pension benefits, it is likely that 25% of your pension fund can be taken tax-free and you will have to pay income tax on the rest, at your marginal rate.

If you will be a higher-rate taxpayer when you stop work, or you get pushed into higher rates of tax, then you'll pay 40% tax on much of your new pension income. If this is the case, you'll need to consider that while you're getting 40% tax relief upfront, you'll then be paying 40% tax on most of the proceeds.

However, if you will be a basic-rate taxpayer when you stop work, then a pension is a more attractive choice. You'll get 40% initial tax relief, and then when taking benefits you'll get 25% tax-free and pay 20% tax on the rest.

A Nisa is a more flexible option as you can access your money whenever you want with no tax deducted.You are also now able to transfer between cash and stocks and shares and vice versa. As you state though, you'll make contributions from taxed income.

There is no perfect solution that will provide you with the most tax-efficient outcome and the most flexibility. You should aim to pick the right wrappers and investments that best meet your objectives.Tax efficiency is an important factor although it shouldn't be the overriding consideration.

[Video:1]