Millions forced to pay more tax

We are all living longer, and that's great news for the taxman.

It seems incredible, but according to the Government more than 10 million Brits alive today will live to see their 100th birthday. As a result, around 17% of us will spend a third of our life in retirement.

Great news if you have a lot that you fancy cramming into your life, whether it’s travel, bungee jumping or simply watching your loved ones growing up.

Living longer costs you!

However, the fact that we are all living longer is also great news for the taxman. According to analysis from MetLife, the taxman is pocketing an extra £8.8bn a year thanks to pensioners living longer.

Life expectancy in the UK has been increasing by a rate of two and a half years per decade, to the point that the average baby boy born today can expect to live 77.7 years, while the average new-born girl will live 81.9 years.

And that increase in life means you’ll be paying more tax. As a result, the nation’s pensioners are now paying an extra £3.95bn in direct taxes each year, with Income Tax (£2.46bn) and Council Tax (£1.45bn) making up the bulk. It’s even worse with indirect taxes, which now total an additional £4.88bn every year, with VAT making up £2.04bn of that figure.

Find out why it’s crucial to keep your pension contributions up even when money is tight

In fact, according to MetLife, the average pensioner household pays out a whopping 30% of their income to the taxman in some form of taxation!

Pensioners and tax

The old saying goes that the only two things certain in life are death and taxes. However, it’s fairly depressing to see just how much tax will still impact on our standards of life once we reach our twilight years.

Let’s take a look at the main taxes pensioners have to pay, and whether there are any opportunities for cutting the eventual bill.

Income Tax

As with those still in the workforce, pensioners enjoy a personal tax allowance – a sum of money they are allowed to receive before tax is payable. The allowances are detailed in the table below. Should your income fall above those levels, then you will be required to pay Income Tax on any income above the allowance.

Age	Personal tax allowance
Under 65	£6,475
65 or over	£9,490
75 or over	£9,640

However, if you're 65 or over and you earn £22,000 or more, your personal allowance will start to reduce. Basically, for every £2 you earn over £22,000, you will lose £1 of your personal allowance. So if you're 67 and you earn £22,002, your personal allowance will be reduced from £9,490 to £9,489.

This process continues until you earn £28,030 or more. At this point, your personal allowance will be right back down to £6,475. The good news is, your allowance will remain at that level until your income reaches £100,000, when it will again start to decline by £1 for every £2 of income above £100,000, right down to zero. So, if your income is £112,950, then you won't have any tax-free personal allowance and will be taxed on 100% of your income - regardless of your age.

Deferral and lump sums

Of course, you don’t have to start taking your State Pension once you reach the retirement age – you can defer the pension for a number of years, and then receive the pension cash you were due in a single lump sum. While the lump sum is taxable, it cannot lift you from being a basic-rate taxpayer into a higher band, nor from being a non-taxpayer to the basic rate, so it may work out as a tax efficient way of doing things.

Council Tax

Council Tax is based on the value of a property, and the people who live there. It is charged on almost all dwellings. However, some pensioners qualify for Council Tax Benefit, which can cut their bills by up to £690 a year according to Age UK.

It’s a means-tested benefit, so generally you will need to have less than £16,000 in savings to qualify. If you have a partner, your application will be worked out on your joint income and savings.

A 25% discount is available if you live alone, while other discounts are also applicable if your home has special features to aid disabled residents (wheelchair space for example). Age UK has a pretty thorough factsheet on Council Tax, and the various discounts, which is worth a read (link opens a PDF).

VAT

VAT is a big expense for pensioners. Figures from MetLife last year (before the recent VAT rise) suggested that the average pensioner household forks out a whopping £1,299 a year on the tax, so that will only get worse this year.

According to figures from the Labour Party (as always with maths performed by political parties, take with a pinch of salt) three million pensioners will see their income fall as a result of the increase in VAT. Labour reckons that the rise in State Pension due in April will be more than wiped out by the increased VAT costs, with better-off pensioners particularly affected.

Sadly, it’s not particularly easy to sidestep VAT, other than to simply spend less!

Pension planning

Related how-to guide

Get ready to retire

There are a lot of things to think about as you get closer to your retirement. But the early you start to prepare, the better.

See the guide

The big lesson to take from all of this is that we need to take our likely tax liabilities into account when planning how much to set aside in our pension. It’s one thing to do your sums and see that you’ll have £10,000 a year to live on. However, if you end up handing over £3,000 of that to the taxman, suddenly your twilight years don’t look quite so comfortable.

Be sure to have a read of How to work out what pension pot you need, while Boost your pension by £416,186! is also worth a read for some tips on how to ensure you have the maximum possible cash available when you pack in work.

Tax after death

Sadly, your tax liabilities do not end with your final breath – if you’re lucky enough to leave a decent-sized estate to your loved ones, you’ll get whacked with Inheritance Tax.

Should you leave an estate worth in excess of £325,000 (or £650,000 for couples), then your loved ones will face a tax bill of 40%. When you take into account the rocketing value of property in the UK, many people will leave estates in excess of that figure simply because they own their own home.

Inheritance Tax is undoubtedly one of the nation’s most hated taxes – the mere mention of it always leads to raised voices with my family – but there are ways to at least lessen your tax burden. Have a read of Avoid paying inheritance tax for tips and tricks on how to keep your bill to a minimum.

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