Retirement tax shock: 30% of income goes to HMRC
The average retired household paid £7,400 in tax last year, a £400 increase on the year before. So, what can you do to cut your tax bill after you retire?
The good news is that pensioner incomes increased last year, up by an average £1,200 to just over £25,000 a year.
That income figure includes the State Pension, private pensions, benefits and other earnings.
Unfortunately, that means the amount of tax paid also rose.
Retired households handed an average of £7,400, or 30% of their income, to the taxman last year, according to the latest research for Prudential.
That takes the total annual tax bill from the nation’s 7.1 million retired households to £52.7 billion.
“We have seen income expectations for new pensioners rise in recent years which, for many will mean that they continue to face tax bills well into retirement,” says Stan Russell, a retirement income analyst at pension firm Prudential.
“People planning to give up work should make sure they don’t underestimate the impact that tax will have on their income in retirement.”
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How the tax bills mount up
Tax bills after you retire mount up thanks to both direct and indirect taxes.
Direct taxes are the ones you hand straight over such as income tax and council tax.
These averaged just over £3,050 in 2015-16 for retired households.
Indirect taxes are ones that are added to other purchases such as VAT, insurance premium tax and vehicle excise duty.
These taxes cost the average retired household £4,360 over the same period.
The vast majority of the tax increase that year came from direct taxation, which rose by £300 on average.
The average retired household paid around £1,970 in income tax in 2015/16 up from £1,700 the previous year.
“No longer working doesn’t mean you’ll no longer be paying taxes, and many retired people will still need to consider income tax bills as well as the other indirect taxation on expenditure that they will continue to face when they give up work,” says Russell.
You will, hopefully, pay less tax once you retire, assuming that your income does fall somewhat.
Prudential’s research found that the average pensioner household paid 30% in total tax, compared to 34% for the average working household.
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How to ease your tax burden
There are many tax bills you can reduce, including Council Tax and VAT on certain purchases.
We put together a guide to paying less tax for over 55s a while back.
Not all tips will be applicable to those in retirement, but it should help keep some of those rising tax bills under control.
More on loveMONEY:
Retired and in debt? What to do
Pension freedoms: think carefully before dumping all your funds into a savings account
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