Tax in retirement

Tax gets unexpectedly complicated in retirement. Which? has a long history of offering clear and helpful advice on tax matters. We look at some of the key issues below and provide some tax guidance.

1. Paying tax on your pension

Taxation in retirement is the same as it is when you’re working. You get a personal ‘tax-free’ allowance, and pay tax on the rest of your income (unless it’s from a tax-free source, such as an Isa).

Income from private pensions is taxed at source and automatically deducted through Pay As You Earn (PAYE). However, state pension income, including additional state pension income, is paid gross (without tax deducted) by the Department for Work and Pensions (DWP).

Any tax due is normally deducted via PAYE from other sources of income by an adjustment in your tax code for these.

Find out more from Which?: Tax in retirement  

2. Tax on savings

You should not be paying tax on savings at all if income from all sources is lower than your tax-free allowance. You may also benefit from a lower tax band on savings.

For this tax year (2014/15), up to £2,880 of the interest from savings is taxed at 10%, if income from other sources was less than your personal allowance plus £2,880.

From April 2015, this 10% rate is replaced by no tax at all on £5,000 of savings income for those with low incomes.

Find out more from Which?: Tax on savings and investment

3. Capital gains tax

Capital Gains Tax (CGT) is a tax on the increase in the value of possessions – such as a second home, antiques or shares – during the time you have owned them. You have to pay the tax when you dispose of them, usually by selling them or giving them away.

You don’t pay CGT on the full amount as you have an initial yearly tax-free allowance: £11,000 in 2014/15. Those who pay basic rate income tax then pay CGT at 18%, but higher rate taxpayers are charged at 28%.

You don’t have to pay tax on all capital gains – see the full tax-free list in the Which? Guide.

Find out more from Which? Capital gains tax explained

4. Inheritance tax

Inheritance tax (IHT) is a tax on money or possessions you leave behind when you die, and on some gifts you make during your lifetime.  However, a certain amount can be passed on tax-free (tax-free allowance).

Everyone in the 2014/15 tax year has a tax-free allowance of £325,000. The allowance has been frozen until at least 2017. 40% tax is due on anything above £325,000, but married couples and civil partners are allowed to pass on their possessions and assets to each other tax-free, and the surviving partner is allowed to use both tax-free allowances (£650,000).

Find out more from Which?: Inheritance tax explained

5. Which? tax calculator

If you’ve got all the information you need about your personal tax situation and want to work out your income tax bill, the Which? tax calculator can help you.

If you need to check tax rates, tax allowances and tax reliefs in more detail before entering your figures, take a look at our guide to tax rates, allowances and reliefs.

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