Annual tax bill for pensioners would be enough to buy a car

two happy smiling elderly...

The average retired household pays an astonishing £6,500 a year in tax: that's enough to buy a cheap car and still keep £500 aside for the running costs. Many have no idea they are forking out such a shocking amount in tax, because three fifths of this is hidden in indirect taxes.

The figures have been released by Prudential, which revealed that pensioners pay a combined total of £47.26 billion a year in tax. They also highlight that it's difficult for pensioners to do much about this, because two thirds of the tax is 'indirect taxation' including things like road tax, duties on petrol, alcohol and tobacco, and VAT.

The lion's share of it is taken up by VAT - which accounts for 8.2% of the average retired household's income.
What can you do?

The other third is made up from direct taxes like income tax and council tax, which is where cuts can more easily be made.

This year, the first £10,500 you receive in income is free of income tax. If one of you earns more than this, and the other earns less, you can save money by transferring savings into the name of the non-tax-paying spouse. Any income from these savings will then fall into their tax-free allowance, and they don't have to pay tax on it.

If you are both taxpayers, you should consider moving as much of your investments and savings as possible into an ISA in order to avoid tax on savings income. Bear in mind that you can also cash in £11,100 of investments each year without paying capital gains tax. It means that if you have a large share or funds portfolio, it may make sense to encash them in chunks, to take advantage of your CGT allowance each year.

New rules

Prudential warned that the direct tax figure would be even higher this year because much of the money released as a result of pension freedoms would be taxed. The Treasury estimated that the new rules would generate £320 million more tax from pensions in their first year.

Stan Russell, retirement income expert at Prudential, said: "The new pension rules that came into effect this April give savers and retirees more choices and greater flexibility over how they take their income. But there is a risk that people could end up paying more tax than they expected which, with careful planning, they might be able to avoid."

He recommended getting advice, or using the Pensions Wise service, to understand how much tax you will face, and get help finding a way to pay less tax. He added that it was "A stark reminder that not all the income you receive in retirement will be yours to spend as you like." So it's also essential to consider the effect of tax when making plans for retirement.

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Where are Britain's highest tax bills?
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Annual tax bill for pensioners would be enough to buy a car
St Albans come in second on the list with a total income tax bill of £10,900 per person.
Windsor and Maidenhead came third with a total income tax bill of £10,200 per person.
The Surrey town of Guildford was fourth on the list with a total income tax bill of £9,830 per person.
England's capital city came fifth with a total income tax bill of £8,580 per person.
Wokingham has a total income tax bill of £7,490 per person. Putting it in sixth place.
Dacorum in Hertfordshire comes in joint sixth place with a total income tax bill of £7,490 per person.
The leafy towns of Reigate and Banstead have a total income tax bill of £7,000 per person.
Tonbridge and Malling take joint seventh spot with a total income tax bill of £7,000 per person.
Wycombe comes last in the top ten with a total income tax bill of £6,820 per person.

A small corner of leafy Surrey has taken the top spot in the league table of the highest income tax bills per person. Residents of Elmbridge pay an astonishing £1.18 billion in income tax every year. That puts a number of the major cities in the shade.
The leafy towns of Esher, Weybridge and Walton-on-Thames are filled with mansions, private estates, country clubs, golf courses, and riversides packed with millionaires. The proximity of Chelsea's training ground in Cobham has also brought well-paid sportsmen to the area.


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