Is it true that you don’t pay tax in retirement?
Well yes and no.
It all depends on where your money is coming from.
How much you can earn before you pay tax in retirement
When it comes to retirement you still have to follow the same tax rules as when you were working.
There is not a separate tax regime for retirees and a different one for workers. It’s just that when you retire, rather than receiving an income from a business, you are taking money out of your retirement savings.
So no, it’s not technically correct to say just because you retire you don’t pay tax in retirement.
However, if your income in retirement is below £12,570 (the current Personal Allowance for tax year 2022/23) then you won’t pay any Income Tax.
The main sources of money that count as income in retirement include:
- State Pension.
- Defined benefit pension income.
- Pension annuity.
- Taxable part of pension drawdown.
- Interest from savings outside of an ISA.
- Dividends from investments outside of an ISA.
You could also add income from an employer or self-employed income if you decided to go back to work in retirement.
If you have stopped working in retirement you won’t pay any National Insurance.
The current full new State Pension is £185.15 per week so £9,627.80 per year.
This nicely fits into the Personal Allowance of £12,570 meaning if your only income in retirement was your State Pension you wouldn’t pay tax in retirement.
You would still have £2,942.20 that you could ‘earn’ perhaps through a little part time job or from other savings, investments and pensions without paying any tax.
Ways to ensure you don’t pay tax in retirement
If you’re looking to spend substantially more in retirement than just the Personal Allowance (£12,570) then this is certainly possible without having to pay tax in retirement.
Other allowances you can use:
- £2,000 Dividend Allowance.
- £5,000 starting rate for savings if your total ‘income’ including savings is below £17,570.
- £1,000 Personal Savings Allowance for basic rate tax payers and £500 for higher rate tax payers.
- £12,300 Capital Gains Tax allowance.
So let’s put this in to practice with an example.
Sandra, 60, wants to spend £50,000 per year in the early years of her retirement. She has a £1,000,000 pension pot, a general investment account worth £250,000 and a stocks and shares ISA worth £400,000.
She works with a Financial Planner to take money from her portfolio in the following ways:
- £16,760 from her pension, £12,570 of which uses her Personal Allowance and £4,190 is part of her tax free lump sum.
- £2,000 dividends released from her general investment account using her Dividend Allowance.
- £1,000 interest released from her general investment account using her Personal Savings Allowance.
- £20,000 sold down from her general investment account which uses up her Capital Gains Tax allowance.
- £10,240 sold down from ISA which is tax free.
By utilising her portfolio tax efficiently Sandra is able to receive an ‘income’ of £50,000 per year and doesn’t pay tax in retirement.
The key here is to make the most of all the tax allowances available to you and there are many more on top of the ones listed above.
You don’t need to wait until retirement to get things ready, it’s best to structure your savings now to maximise your use of all the allowances in retirement.
If you would like to ensure you don’t over pay tax in retirement then please schedule a no obligation free 15-minute call.
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.
