How to pay less tax in retirement

18th September 2015


How to save your money from the taxman in retirement


If you’re retired and feel that you’re paying too much tax then there are steps you can take to grab back money from the taxman..


Statistics published today by Prudential show over-65s pay 11% of the total amount of income tax paid in the country, costing them £17.5 billion a year but David Smith, director of financial planning at Tilney Bestinvest, said you don’t need to pay out as much as you think.


Here are Smith’s top tips for reducing your tax bill and boosting income:


Check your tax code


‘Post-retirement the vast majority of UK pensioners do not complete annual tax returns,’ he said. ‘This is perceived as a bless, as young and old alike detest completing HMRC’s daunting annual return. However, the sad reality is that your tax code may be incorrect which could well mean that you are paying more income tax than necessary.


Smith said that you don’t have to sit on the phone to the taxman to check your code as there are online calculators that can do the job.


Checking your tax code is vital for those in retirement who shouldn’t be paying national insurance on their earnings.


‘It’s now also commonplace to see many still needing, or often wanting, to work past state pension age; remember, you shouldn’t be paying national insurance on these earnings.’


Rent a room


Retirees can also boost their income by renting out a room in their home without paying tax, said Smith.


‘Ever more pensioners need to rent out rooms in their own home just to get buy,’ he said. ‘Remember, the ‘rent a room’ scheme can allow you to receive up to £4,250 in rent each year tax free, from a lodger in your own home.’


Split your savings


Very often in couples one half will take care of the finances and it may mean that all the savings and investments are in their name, meaning one person’s tax allowances are going to waste.


‘Too often I see the majority of savings held in a sole pensioner’s name,’ said Smith. ‘Often this is the main breadwinner and therefore the highest taxpayer. Remember that assets can be switched between spouses without any tax implications whatsoever, so try and ensure that investments subject to income are held in the name of the lowest taxpayer.’


Reduce capital gains tax (CGT)


CGT is paid on growth on investments and every person has an annual CGT allowance of £11,100 in the 2015/16 tax year. CGT is paid at 18% for basic rate taxpayers and 28% for higher rate taxpayers.


‘CGT is yet another form of tax often paid unnecessarily,’ said Smith.


‘I recently saw one client who had sold a house in London that he used to live in. He paid CGT in full as he didn’t realise that he could reduce his tax bill by virtue of the fact that he lived there for a time – I’m working on getting some of this tax back for him at the moment.’


Smith said that the biggest overpayment of tax he sees is pensioners selling Oeics and unit trusts ‘without ever planning for disposal of considering the tax implications’.


‘When a married couple own an asset jointly, a gain of £22,200 can be relaised before CGT becomes payable,’ he said. ‘Again the inter-spouse exemption can be used to pass between partners without it being classed as a disposal for CGT purposes. This means that individuals can pass all, or part, of their portfolio to a spouse who may have more CGT allowance available, or who may be subject to a lower rate of CGT on disposal.’




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