Pensioners: five steps to paying less tax

Updated
Senior exercising at gym
Senior exercising at gym



Apparently the average pensioner is paying £3,285 each in income tax every year - amounting to a total of £17.5 billion a year and accounting for 11% of all the income tax paid in this country. To add insult to injury, there's a very real risk that many of them are paying far more income tax than they should.

There are five steps all pensioners should take to check they aren't being ripped off by a tax-happy government.

1. Check you are paying the right rate of tax

David Smith, Director of Financial Planning for Tilney Bestinvest, says: "Post-retirement the vast majority of UK pensioners do not complete annual tax returns. This is perceived as a blessing, 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." You can check this either by calling HMRC or using any of the many online calculators.
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2. Check you're not paying NI

If you are currently working, then you should be paying tax on your earnings, but not National Insurance, so you also need to check your payslips to see whether your employer is automatically deducting it.

3. Consider your savings

Smith says: "Too often I see the majority of savings held in a sole pensioner's name. 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 tax are held in the name of the lowest taxpayer."

4. Think before cashing in investments

If you are cashing in investments, you need to understand the best way to do it in order to keep your tax bill down. Smith explains that many people have built up investments over time - and when they are sold they will all be subject to capital gains tax. Each year you can take a portion of this out as cash before you pay any CGT on it. However, for any year when you don't cash in any of your investment, you lose your CGT allowance for that year. He adds: "With careful ongoing planning, some or all of a portfolio can be sold to fully utilise an individual's annual CGT allowance - without ever creating a tax liability."

5. Don't forget inheritance tax

It's easy to focus on the tax we are paying today, and forget about the tax on our estate when we pass away. There are several important steps you can take in order to reduce your liability. If your spouse or civil partner died and left their estate to you they won't have had to pay any inheritance tax, and won't have used any of their allowance. This means it can be passed to you. You will need to be sure whoever is your executor knows they are claiming both IHT allowances.

There are also a number of gifts you can make to reduce the size of your estate - and therefore cut your tax bill. You can make a gift of any size and as long as you live seven years after handing it over, it is exempt for inheritance tax purposes. You can also make a number of tax exempt gifts each year, including wedding gifts of up to £5,000 to each child or regular gifts from your income.

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