MILLIONS of pensioners will see their income hit by Labour’s ‘retirement tax’, but there are ways to minimise the impact on your finances.
Earlier this week The Sun exclusively revealed 8.2million people over the age of 60 will be dragged into paying income tax by 2027/28.
The government’s decision to continue the freeze on tax thresholds, coupled with high inflation, will cause millions of households to start paying income tax in the next three years.
Data provided by HMRC through a freedom of information (FOI) request made by wealth manager Quilter and shared exclusively with The Sun, showed nearly 18million people will be forced to pay income tax.
Of those, 8.2million will be over the age of 60 and paying tax on their retirement income for the first time.
Tax thresholds usually increase every year in line with increases in the state pension and wages.
This ensures that workers and pensioners are not worse off in real terms.
But in April 2021, the then-Conservative government froze all tax thresholds until 2028.
The freeze means many people will be forced to pay tax for the first time or will pay it at a higher rate.
The state pension increases every year in line with inflation, 2.5 per cent or wage growth – whichever is highest.
But inflation has soared in the past couple of years, so the state pension has increased by more than usual to keep up with rising costs.
As the tax thresholds have not moved, this means pensioners may need to pay tax on their payments or pay it at a higher rate.
[bc_video account_id=”5067014667001″ application_id=”” aspect_ratio=”16:9″ autoplay=”” caption=”What are the different types of pensions? ” embed=”in-page” experience_id=”” height=”100%” language_detection=”” max_height=”360px” max_width=”640px” min_width=”0px” mute=”” padding_top=”56%” picture_in_picture=”” player_id=”default” playlist_id=”” playsinline=”” sizing=”responsive” video_id=”6348910230112″ video_ids=”” width=”640px”]Originally, the government predicted that around 1.3million people would be dragged into paying income tax, with a further 1million people paying at the higher rate.
But the latest figures show this has leapt up to almost 30million people affected in total.
[authenticated-scripts src=”%3Cscript%20class%3D%22palin-poll%22%20src%3D%22https%3A%2F%2Fwww.thesun.co.uk%2Fpollingwidgets%2Fv3%2Fwidget.js%3Fquestion_id%3D112532%26game%3Dpolling%22%3E%3C%2Fscript%3E” type=”embedded” width=”100″ /]Around 18million will start to pay tax – 8.2million of who will be pensioners.
But, there are ways those in their retirement can minimise the impact of the increase.
Laura Suter, director of personal finance at AJ Bell, and Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, share their tips.
Consider putting your savings into an ISA
An individual savings account (ISA) is a type of tax-free savings account.
You can pay in up to £20,000 each year and earn interest on your nest egg.
It can be a good option if you have a lot of cash savings, for example if you have inherited some money or sold a house.
This is because you do not need to pay tax on any of the interest you earn.
Meanwhile, if you paid the same sum into a savings account you may have to pay tax depending on how much you earn in interest.
If you are a basic-rate taxpayer then you can earn up to £1,000 in interest each year without needing to pay tax.
But if you are a higher rate taxpayer then your allowance drops to just £500.
Meanwhile, if you are lucky enough to be an additional rate taxpayer then you cannot earn any interest on your savings without paying tax.
If you decided to pay the same lump sum into a private pension then you may need to pay tax to withdraw it again.
This is because you can can usually only withdraw 25% from your pension as a tax-free lump sum.
After that you can earn up to £12,570 a year as income before you need to pay tax.
Money you get from the state pension, your private pension and any benefits are all considered as income.
But by keeping your money in an Isa, rather than a private pension, you can access your cash tax-free.
Laura Suter explained using an example of someone withdrawing 4% a year from a £100,000 ISA pot.
This would give you an income of £4,000 a year that you do not need to pay tax on.
Laura said: “Pensioners looking to reduce their tax bill need to think about how they can maximise their tax-free income.
“For example, any withdrawals made from their ISAs will be free of any tax, so they can use that pot of money to boost their income without impacting their tax bill.”
Make the most of your other pensions
It’s tempting to take out your whole private or workplace pension when you reach retirement and put it into a savings account.
But if you do this you could end up paying income tax and tax on any interest you earn.
Instead, think about withdrawing your 25% tax-free lump sum.
You can either do this all in one go or in smaller gradual amounts to top up your state pension without being taxed on it.
Laura said: “You can take ad-hoc amounts or regular withdrawals from the pot to use your tax-free amount gradually.
“This is a great way of boosting your income but not increasing your tax bill.”
Marriage Allowance
If you are married or in a civil partnership you might be able to reduce the amount of tax you pay overall via the Marriage Allowance.
It lets you transfer some of your personal allowance to a spouse if you do not pay tax on your income and they are a basic-rate taxpayer.
To be eligible you must earn less than £12,570 and they must have an income of between £12,571 and £50,270.
Marriage Allowance for this current tax year is worth £252.
Helen Morrissey, from Hargreaves Lansdown, said: “The non-taxpaying partner can transfer £1,260 of their Personal Allowance to their partner.
“This reduces their own personal allowance so it might mean they end up paying some tax but the boost to the taxpaying spouse means you pay less tax overall as a couple.”