The tax burden on retirees’ income is significant. Here’s what you could do about it

It’s often thought that the tax burden is the responsibility of the working generations, seeing them contribute to the public purse from their employed earnings.

This is of course largely true – Income Tax and National Insurance contributions (NICs) paid by employed workers and business owners are considerable elements in the government’s tax take.

However, a fact that’s often overlooked is that retirees’ income makes up a notable portion of it, too. According to research published in Professional Adviser, retired households now face a 15.4% direct tax on their income each year, adding up to more than £57.22 billion.

The average bill for direct taxes on a retired household lies at £4,961, predominantly constructed from Income Tax, Council Tax, and NICs.

This is of serious concern for retirees for two reasons:

  1. You’ll need this money to fund your goals and ambitions in retirement. The more you pay in tax, the less you’ll have for achieving these goals.
  2. Outside of any State Pension you receive, your funds are finite. Beyond interest and investment growth, you likely won’t be earning any more money.

As a result, you can imagine why it’s so important to find methods that can mitigate your tax bill in retirement.

When you work with us at Britannic Place, we always build these considerations into the financial plan we create for you.

So, find out the methods at your disposal to limit your retirement tax burden, allowing you to focus on using your wealth to fund your dream lifestyle.

1. Draw your retirement income tax-efficiently

The first thing you can do is try to draw your retirement income as tax-efficiently as possible, especially from your pension, to minimise your Income Tax bill.

According to the research in Professional Adviser, the largest portion of Income Tax came from that on private pensions, with the average bill lying at £3,359 – nearly 70% of the average bill.

As a result, carefully drawing income so that you lie in a lower tax band can make a significant difference to your tax burden.

The table below shows you the Income Tax rates in the 2022/23 tax year:

In April 2023, the additional-rate threshold will also be reduced to £125,140, meaning even more retirees may be in line to pay the top 45% rate.

So, by carefully drawing income from your pension, you may be able to keep yourself in a lower tax band, reducing the rate of Income Tax you pay.

Meanwhile, if you can form part of your income by withdrawing investments held in a General Investment Account (GIA), you would be able to make use of the Capital Gains Tax (CGT) exempt amount and the Dividend Allowance, too.

Standing at £12,300 in the 2022/23 tax year, the CGT exempt amount allows you to liquidate investments that have generated gains before tax is due.

Tax is typically only charged on gains an investment has made. So for example, had you bought shares for £20,000 that were now worth £40,000, only the £20,000 would be liable for tax.

The CGT exempt amount would then reduce this taxable sum to £7,700, further limiting the tax bill you’d face.

Meanwhile, the Dividend Allowance means that