Published On:

Pensioners can claim £23,426 tax-free personal allowance to beat Labour | Personal Finance | Finance

Share This

Around 8.27million of the UK’s 12.3million pensioners paid income tax last year, and this is set to hit almost nine million this year, with many pulled into higher tax bands.

This compares to less than five million in the 2010/2011 tax year, marking a huge rise under the Tories who lifted our tax bills to a 70-year high.

Yet with careful planning pensioners could potentially generate income of more than £23,000 a year without handing a penny to HMRC, figures from Gary Smith, partner in financial planning at Evelyn Partners, suggest.

Smith calculates that it is possible for a retiree to enjoy an income of £23,426 a year free of tax. In doing so, they could almost double their own effective personal allowance. Some could draw an even bigger tax-free income.

They can do this by using five allowances available to millions.

Even if you can’t take advantage of all of the following five tax-saving steps, using just one or two could reduce your income tax exposure.

1. Use your personal allowance. Everyone can earn up to £12,570 a year before paying any income tax.

Smith said: “With the full new state pension worth £11,502 a year, pensioners can receive £1,068 of income on top of that before hitting the allowance and paying tax.”

The amount will slowly shrink, possibly to nothing within a couple of years, depending on triple lock state pension hikes.

Happily there’s more you can do.

2. Take your pension tax-free lump sum. Pension savers can take 25 percent of their pot free of tax, in a hugely valuable and popular benefit.

Yet but many don’t realise that they don’t have to do it all in one go, Smith said.

“To pay no tax, set your annual withdrawal at £1,424 gross. Of this, 75 percent, or £1,068, falls within the personal allowance. The remaining 25 percent, worth £356, can be taken from the tax-free element of the pot.”

This would lift your total tax-free income so far to £12,926 and there’s more you can do.

3. Use your savings. Under the starting rate for savings, lower earning pensioners who get income of less than £12,570 a year can take £5,000 worth of savings interest a year free of tax.

This lifts potential tax-free income to £17,926 under Smith’s tax-saving model. As Martin Lewis has pointed out, this tax break is not widely known and often goes unused.

Basic rate tax payers also qualify for the personal savings allowance, or PSA, which allows them to earn savings interest of up to £1,000 a year before income tax kicks in. This lifts their potential tax-free income to £18,926.

4. Don’t forget the dividend allowance. Shares held outside of the tax-free Isa wrapper are liable to both dividend tax and capital gains tax, but only above a certain limit.

In the current year, investors can draw dividend income up to £500 free of tax and take capital gains of £3,000, too.

That could lift their total tax-free earnings to a potential £22,426 but Smith cautioned: “To achieve the CGT saving, you need to have made a capital gain that can be easily realised.”

5. Online trading. Smith notes that everyone can also earn up to £1,000 tax-free from buying and selling on internet trading sites like eBay, under the trading allowance. This lifts the potential tax-free income total to £23,426 a year.

Couples can double most of these tax-free amounts by using both sets of allowances, he added. “Transfers of assets between married couples and those in civil partnerships do not trigger tax liabilities, allowing flexibility to achieve tax efficiency.”

Those who save or invest inside the £20,000 tax-free Isa wrapper can earn even more tax-free income. “It pays to save as much as you can in an Isa,” Smith said.

When it comes to Isas, the sky’s the limit. There is no lid on how much tax-free income you can take. It all depends on how much you tuck away.

More sophisticated investors can seek tax-free dividends from specialist investments such as Venture Capital Trusts (VCTs) and tax-deferred withdrawals from offshore investment bonds, Smith added.

Labour chancellor Rachel Reeves is set to launch new tax raids this autumn – here are five things you can do to fight back now.

Source link

Most Popular News