After paying into the system for so many years, people will naturally want to avoid having to pay even more taxes. But the state pension is subject to income tax, along with any other income and pensions a person receives, so it’s worth knowing what can be done to reduce their tax bill.
Express.co.uk spoke to several financial experts about the different ways people can organize their finances for their final years.
The state pension is paid gross, without tax deduction, usually every four weeks into a person’s bank account.
State basic full board is currently £141.85 per week.
Men born on or after 6 April 1951 and women born on or after 6 April 1953 receive the new state pension instead, while the full new state pension is £185.15 a week.
If that’s all a person receives for their income, it’s likely to be less than the personal tax-free allowance.
But those who are still working or earning income from an investment, rental property or other retirement pots will have to pay income tax on anything over their personal allowance.
Claire Trott, divisional director of retirement and holistic planning at a wealth management firm St. James Squareexplained how the tax invoice is established.
She said: “If the only other income received is either from employment or from another pension, then tax will be considered through these payments as part of the Pay As You Earn (PAYE) process. ) managed by those who make the other payments.
“This means that the tax code applied takes into account the payments made under the state pension, thereby reducing the personal allowance available on these payments.
“If other income is received in the form of investments or rental of property, the state pension as well as any other income will have to be declared during the self-assessment to ensure that the correct amount of tax is paid annually.
Fortunately, there are ways to organize someone’s income so that they don’t have to pay taxes.
Ms Trott said: “You have to pay all your taxes due, but how you access your income or where you invest can make a difference on what is payable.
“It’s the same for those who work as for those who receive state pensions. There are no special rules here for those who are over the legal retirement age.
“For example, for real estate rental, it is imperative that the deductible expenses incurred in connection with the rental are declared on the self-assessment, legitimately reducing the income tax payable.
“The structure of investments made before retirement can provide greater access to income without having to pay tax, such as ISAs which can be drawn on tax-free.
“Other allowances can be used each year provided the assets are in the right place, depending on your total income you may receive the first £5,000 of tax free savings interest (starting rate of savings) and up to £1,000 personal savings allowance.”
Benefits decrease as a person’s income increases.
Funds can also be received by selling assets, although in this case people should be aware of capital gains tax.
Until the asset has increased in value by £12,300 or more, there will be no capital gains tax payable.
Ms Trott said: “This does not mean that assets have to be sold every year, but careful sales planning can ensure that this allocation is used appropriately.
“Making charitable donations can also reduce the amount of tax you have to pay overall.”
Another option for reducing a person’s tax bill is to transfer part of a personal allowance to a husband, wife or civil partner.
Marriage Allowance allows individuals to transfer £1,260 of their Personal Allowance to a partner, reducing the recipient’s tax bill by up to £252 a year, meaning that as a couple they pay less of taxes.
If a partner in marriage or civil partnership was born before April 6, 1935, they can qualify for Married Couples Allowance, which could save even more, up to £941 per tax year.
Savings can be split between partners if one does not pay enough tax to benefit.
Ms Trott urged people to plan ahead given the different ways they can organize their income to avoid tax.
She said: “There are many moving parts, all of which can lead to significant, legitimate tax savings in the long run.
“Planning is important when it comes to savings and investments to ensure funds are held in the most tax-efficient vehicle and the right allocation is achieved.
“So when it comes to accessing funds, those savings aren’t eroded by unnecessary taxes to pay.”
Michael Lapham, Accounting Group Financial Planning Manager Mercer & Holesaid it’s essential that people plan for their future years – with some even putting money aside for the next generation’s retirement.
He said: “It is important to seek advice early and the sooner the better.
“For most individuals this means as soon as they start earning money, but given the tax efficiency of pension contributions, it has become more common in recent years than other family members , usually parents or grandparents, contribute to the pensions of non-working children and adults.
“The key is that the longer the period of time money is invested, the more likely it is to benefit from investment growth.”
He recommended looking at a retirement product that includes a flexible access levy, providing flexibility to work around available tax brackets.
He said: “It is unlikely that the value of your pension will be subject to inheritance tax on your death, so you should, if possible, use other sources of funds and only access your pension by last resort.”
Research of Kreston Reeves Financial Planning recently found that only 36% of people aged 35-59 and 32% of those over 60 believe they have enough money in their pension to fund the retirement they want.
Kim Williams, the group’s director of financial planning, said: ‘Pensions can offer many benefits for saving for retirement, including the benefit of tax relief at your top marginal rate on personal contributions which, depending on the type of policy, method of tax relief used and one’s own personal circumstances, is either claimed by the pension provider themselves or added immediately in the case of a wage sacrifice/exchange used for workplace retirement policies.
“Any growth in the value of the UK pension is exempt from UK income tax and capital gains tax.
“As long as he remains invested inside the retirement package.
“Overseas investments or non-UK registered pension schemes will have different tax treatment depending on your circumstances.”