When you retire, you will need to pay tax on your annual income if it is more than the Personal Income Tax Allowance. The 2019/20 Personal Allowance is £12,500.
If your annual income is between £12,501 and £50,000 you are taxed at the basic rate of 20%. If your income is between £50,001 and £150,000 you are taxed at the higher rate of 40%. Any income over £150,000 per year is taxed at 45%.
You do not pay National Insurance contributions on your pension income.
At Four Wealth Management, a financial adviser will advise you of any changes in legislation that may affect your income or the amount of tax you need to pay.
What tax do I pay on my pension pot?
You can normally withdraw 25% of your pension pot free from tax. You can take this as a one-off lump sum or receive 25% tax-free from multiple smaller withdrawals.
You then pay Income Tax on the other 75%. The 25% tax free amount from your pension does not count towards the £12,500 Personal Income Tax Allowance which you do not have to pay income tax on.
Where will my income come from when I retire?
When you retire you may receive income from multiple sources, including the State Pension, a Private pension, any earnings from employment, income from investments, property or savings.
Is there any income I can receive tax free?
In the 2019/20 tax year, you can receive £1,000 of income from self-employment free from tax. This is known as a ‘trading allowance’. This exemption only applies to individuals, not partnerships. If your self-employed income is £1,000 or less you do not need to report this income to HMRC.
You can also receive £1,000 of income from a property you rent tax-free. If you rent out a furnished room in your own home, you can receive up to £7,500 tax free.
Tax relief on savings
The Personal Savings Allowance in the 2019/20 tax year is £1,000 for basic rate tax payers and £500 for higher rate taxpayers. If your savings income is over the allowance, the tax due is collected by HMRC through your PAYE code.
Interest you receive from tax-efficient savings accounts such as a Cash ISA is paid tax-free.
Do I need to inform HMRC when I retire?
Your pension providers and employer usually notify HMRC if you are retiring. If you are self-employed and about to retire you must tell HMRC.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
Expert retirement advice
If you are close to retiring and wish to discuss the options available to you with regards to receiving income at retirement, contact one of our Financial Advisers today on 0117 973 0500.