2 important tax considerations if you’re returning to work after retiring

Figures suggest that millions of retirees are deciding to return to work for a variety of reasons. While it could be beneficial and support your wellbeing, it may complicate your tax liability. Read on to find out the areas you might want to consider if you’re thinking about re-entering the workforce.

A Legal & General study revealed that 2.8 million UK workers over 50 have returned to work after previously retiring.

While money was a key motivator for 37% of those returning to work, other reasons were sometimes just as important. Indeed, 62% said a desire to stay mentally active was a factor influencing their decision, and 32% said work gave them a sense of purpose.

Interestingly, just 3% plan to return to work full-time. Instead, the majority plan to balance work and their personal life to create a lifestyle that suits them. That might include working part-time or carrying out seasonal work that fits around other goals.

If you’re considering returning to work in some form after your retirement, here are two important tax considerations to weigh up.

1. You may need to consider multiple sources of income when calculating Income Tax

If you’re returning to work, you might have several income streams that you need to consider to effectively manage your Income Tax liability.

You might need to calculate the income you receive from:

• Employment
• State Pension
• Defined benefit pensions
• Defined contribution pensions

As Income Tax is calculated based on your total income, you may need to consider how your income from all of the above, as well as other sources, adds up. Otherwise, you could end up with an unexpected tax bill, especially if you cross tax thresholds without realising.

As a result, you might choose to defer your State Pension or pause the income you receive from your personal pension so your total income doesn’t exceed the threshold for paying the higher- or additional-rate of Income Tax.

There could be other ways to supplement your income without increasing your Income Tax liability too. For example, you might choose to access savings or investments that are held in an ISA. A financial plan could help you explore the different options and assess what is right for you.

2. The amount you can tax-efficiently contribute to your pension may be lower

One of the benefits of returning to work is that it could provide an opportunity to boost your pension. Increasing your contributions now could mean you’re able to enjoy a more comfortable lifestyle in the future.

Usually, you can contribute up to £60,000 to your pension in the 2024/25 tax year and receive tax relief. This makes saving into a pension tax-efficient.

However, if you’ve already accessed your pension to create a flexible income or to purchase a flexible annuity, you may have triggered the Money Purchase Annual Allowance (MPAA). The MPAA reduces how much you may add to your pension tax-efficiently to just £10,000 during the tax year.

Pension contributions that exceed the MPAA will trigger a tax charge so it’s important to be aware of whether you’re affected and to monitor your contributions during the tax year.

The MPAA won’t typically be triggered if you’ve taken a tax-free cash lump sum or you’ve accessed a small pension pot valued at less than £10,000 or taken a lifetime annuity. However, it’s crucial to check this is the case before you start making pension contributions to avoid an unexpected tax bill.

A tailored financial plan could help you manage your overall tax liability

Personal circumstances will affect your tax liability and the allowances you might be able to use. So, a tailored financial plan could help you to identify ways to efficiently manage tax on your income once you’ve retired, including if you’ve returned to work.

You might have other taxes you need to consider in retirement too, such as Capital Gains Tax if you’re disposing of assets or investing outside of a tax-efficient wrapper. Again, a bespoke financial plan could help you minimise a tax bill, so your assets go further and support your retirement goals.

Please get in touch to talk about your retirement plans and tax liability.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.