Did you know it is possible to generate a tax free income in retirement from your savings of £47,600 per annum just by using some of the tax allowances available to you?

You’ve worked hard all your life, saved and paid your taxes.

Don’t make the mistake of paying even more taxes in retirement. Don’t let the government be a major beneficiary of your retirement income.

Why tax allowances are so valuable

In the 2016 research from the TaxPayers’ Alliance (TPA) found that the average UK household will pay around £826,030 in taxes during their lifetime.

They calculate an average household to be one that earns a gross income of around £41,000.

If you’re a higher earner and in the top 20% of income then you will pay around £1.68 million in lifetime taxes.

These figures include both direct taxes and indirect taxes.

It’s interesting when you break down the figures even further.

For example, an average household will pay around £169,371 of VAT and £65,068 in Council Tax payments during their lifetime.

When was the last time you worked out how much tax you are paying?

Yes there’s the obvious taxes like Income Tax, National Insurance and VAT. But what about Fuel Duty, Car Tax and Stamp Duty?

When people talk about a squeeze on income, it’s the government that take the biggest share of your income.

So when it comes to retirement or even just withdrawing from your assets, the last thing you want to do is end up paying more tax on the savings you have worked so hard to build.

Well the good news is that you don’t have to. With the right planning you should be able to enjoy a retirement virtually tax free. At least from direct taxes anyway!

The key is to be prepared and make the most of the different savings wrappers and tax allowances available to you.

Some simple tax allowances available to you


Let’s start with pensions.

For most defined contribution pensions, when you come to make withdrawals, 25% is tax free and the other 75% is subject to Income Tax.

Some people think the best thing to do with their pensions is to withdraw the entire tax free lump sum on retirement. Don’t make this huge mistake with with your pension lump sum

Before you reach State Pension age, if you have stopped working you will have your full Personal Allowance available to you. This is currently £11,850 (2018/19 tax year).

So this means you can withdraw £15,800 tax free from your personal pension. £11,850 from the 75% taxable element (although you don’t pay tax because it’s within your Personal Allowance) and £3,950 from the 25% tax free element.

Interest from savings

I’m talking cash savings here from a bank savings account, not in an ISA.

Basic rate taxpayers are entitled to earn £1,000 per year tax free from interest on savings. This is called the Personal Savings Allowance.

Better still if your total taxable income is less than £11,850 you won’t pay any tax on a further £5,000 of interest on savings via the Starting Savings Rate.

Dividends from Stocks and Shares

Again this applies to non ISA holdings.

The current Dividend Allowance is £2,000 per team year, meaning you can earn £2,000 in dividends from your share holdings outside of ISAs before paying any tax on them.

So there you have it. Add together your Personal Allowance, Savings Allowance, the Starting Savings Rate and the Dividend Allowance and you can potentially generate a £23,800 per year income completely tax free!

If you remember at the start of this article I said you could actually generate an income of £47,600 per year and that’s still true because you just multiply all of the above allowance by 2 if you have a partner as they are entitled to all the same allowances. So that’s £47,600 per household!

Of course don’t forget you can still generate more tax free income in retirement by using ISAs and tax free lump sums from your pensions and much more.

So whilst the government takes with one hand via the taxes we face everywhere we look, it also gives with the other hand with generous tax allowances if you know where to look.

If you are just about to retire or have recently retired then there are still ways to restructure your savings so you can make the most of the tax allowances available to you.

Even better still though, the earlier you are away from retirement the more time you have to put the right planning in place now to make your position even better.

Every year that goes by means a years worth of allowance you may not have contributed to the right savings or investment product.

QUESTION: Why not get a review of your savings to make sure they are in the right products to generate a tax free income for you in retirement?  

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.