A A A

5 tips to reduce your tax bill in retirement

If you’d like to keep your tax bill to a minimum here are 5 tips to help you get started.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Michelle Branco

Published on 10 January 2020

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

HMRC collected £622.8bn in taxes last tax year. This includes tax deducted from pension income, interest from cash savings and investment income.

No one likes paying more tax than they need to, especially when it’s from their hard earned savings. But it’s easily done if you’re not sure how tax works.

To help, here are 5 quick tips to keep your tax bill to a minimum, plus our full guide to saving tax in retirement.

Pension and tax rules can change and any benefits will depend on individual circumstances. This article isn’t personal advice. If you’re not sure what’s best for your circumstances, it could be wise to seek advice from a tax expert.

Take full advantage of your pension tax-free cash

You can usually take up to 25% of your pension tax free, from age 55 (rising to 57 in 2028). You can take this all in one go or in stages.

These flexibilities are worth taking advantage of and could be particularly useful if you decide to semi-retire, for example. The tax-free cash could be used to cover the drop in your earned income, helping you to phase into retirement rather than give up work completely.

You can also make taxable income withdrawals from your pension at the same time, or postpone these until a later date. All of this will depend on how much of your pension you want to access at one time and how you want to receive the taxable part of your pension.

If you’d like to learn more about tax-free cash and accessing a pension, our guide to taking money from a pension explains the different options available in more detail.
Be mindful of pension withdrawals – they’re taxable

You can withdraw as much income as you like from your pension and change the amount you take in line with your needs. But there’s a potential sting in the tail.

Pension income (not including any tax-free cash you take) is added to any other income you’ve received that same tax year to work out if income tax is due.

So timing and keeping track of your allowances is important. Spreading your income withdrawals throughout the year and over a number of tax years, rather than making large one-off withdrawals, for example, could save you a substantial amount of money.

You should also be aware that, because of the way the tax system works, you could pay up to 45% tax on your initial pension withdrawals (up to 46% for Scottish tax payers). This is because an emergency tax code is usually applied to these payments. HMRC will eventually pay back any overpaid tax, but you should factor this into your plans.

Use our emergency tax calculator to see how much tax might be deducted from your pension withdrawals under the emergency rate tax.
ISAs can shelter your cash and investments from tax (plus withdrawals are tax free)

Interest received from cash savings over your personal savings allowance is taxable. Likewise, income gained from equity based investments is subject to income tax if over £2,000. Although no tax would be due on either of these if your total income is under the personal allowance.

The standard personal allowance is £12,500, but yours could be higher or lower depending on your circumstances.

However, within an ISA (such as our Stocks and Shares ISA) you pay no UK tax on income or capital gains. Paying less tax could mean higher returns for you (and less work if you need to complete a tax return).

Investing as much as you can in an ISA each tax year could allow you to build up a sizeable tax-free investment. You can hold a Cash ISA or Stocks and Shares ISA for as long as you like, and make tax-free withdrawals whenever you need to. The total amount you can invest in ISAs in the 2019/20 tax year is £20,000. Unlike cash, investments will fall as well as rise in value so you could get back less than you invest.

Find out more about tax on cash savings, investment income and investment gains held outside of an ISA in our full guide below.
Make full use of your tax allowances as a couple

If you’re married or in a civil partnership, you could use each other’s allowances and tax bands to save tax. This might involve transferring investments between you, often to the spouse or partner who pays less tax.
Be smart and plan ahead

Inheritance tax is the tax owed on the value of your estate, which includes the total value of your property, savings, investments and possessions, when you die. The current threshold for inheritance tax is £325,000, meaning any portion of your estate in excess of this could be taxed at 40%. An additional threshold of £150,000 (2019/20 tax year) may be available if you own your home.

One way to cut the amount of tax payable is to reduce the value of your estate. This could include making gifts or contributing to a pension, where payments after death could be free of income tax and inheritance tax.

Inheritance tax planning is complex. It’s one of the main reasons investors come to us for personal advice. You shouldn’t make any decisions based solely on the above, and should get in touch if you’d like to discuss your situation with an adviser.