7 ways for the over 50s to pay less tax

The over 50s are more worried about tax rises than anything else. Don't miss these seven tips for paying less.

According to Aviva’s latest Real Retirement Report, those in their mid-50s and over are more concerned about rising taxes and the cost of living than their health, or even the death of their partners. In fact, just under two-thirds (64%) are worried about an increase in taxes over the next five years.

Of course, if you’re on a fixed income in your retirement, you may feel particularly vulnerable to changes in taxation. So here are seven tips on how to cut your tax bill:

1. Use your ISA allowance

Cash ISAs are still a great way to earn tax-free interest on your savings. If you’ve got money sloshing about in ordinary taxable savings accounts, and you haven’t used up your ISA allowance yet, you should think about applying now. After all, the sooner you start enjoying a tax-free return, the better.

Under the current rules, you can save a maximum of £5,100 each tax year and your return will be totally tax-free. If you’re after easy access to your savings, try the Barclays Golden ISA Issue 2 which pays 3.10% including a 1% fixed bonus for 12 months. But hurry - Barclays are reducing the rate for new customers on 1 June.

If you can afford to lock some money away, you can earn higher rates with a fixed rate ISA. By tying your cash up for a year you can earn 3.25% with the Coventry Building Society until 31 May 2011. You will, however, need a deposit of £5,100 to open the account.

You could fix your ISA rate for longer and get better rates still, but generally we think short-term fixed rate ISAs are a better choice to protect your return from becoming uncompetitive when interest rates start to rise.

Compare cash ISAs at lovemoney.com

2. Take tax-free cash from your pension

If you have a personal pension which you haven’t yet taken benefits from, remember you’re entitled to take up to 25% of the accumulated pot as a tax-free cash lump sum. But, of course, by reducing your pension fund by a quarter, the regular taxable income you’ll be able to draw from it will be lowered accordingly.

Here’s a rough idea of figures: let’s say you have a pension pot worth £100,000 and you retire at 65. On current annuity rates, this fund could provide you with an annual income of around £6,937*. But if you took £25,000 out of the fund as tax-free cash, your income could be reduced to £6,146 a year - or £791 less.

To find out more about taking tax-free cash from pensions, take a look at Make the most of your pension pot.

3. Make the most of your personal allowances

Your personal allowance is the amount of income you can earn before you start paying any tax. Unfortunately, the allowances have been frozen this tax year (2010/2011) and aren’t any more generous than they were in the previous tax year.

But that doesn’t mean you and your spouse/partner can’t juggle your allowance to your benefit. For example, if you’re a taxpayer, but your spouse isn’t, consider moving income-producing assets, including your savings, into their name to limit the amount of tax you pay in total.

The quick table below shows how much you can earn tax-free. You’ll see that the allowance increases significantly for those over 65:

*Age-related personal allowances reduce by £1 for every £2 of income above the income limit of £22,900. From this tax year the allowance for people aged 65 to 74 and 75 and over can be reduced below the basic personal allowance where the income is above £100,000.

4. Check your tax code

Your tax code indicates how much you can earn tax-free, and tells your employer or pension company how much tax should be deducted from your salary or pension income. That’s why it’s so important to check your code is correct to ensure you’re not paying more tax than you should be.

Earlier in the year, HM Revenue & Customs (HMRC) admitted that literally millions of inaccurate PAYE coding notices had been sent to taxpayers. So there’s a chance that, if you haven’t already checked yours, it may be wrong. In this case, you should contact your Tax Office immediately.

You should be particularly careful if you have recently turned 65 or 75 because you'll now be entitled to the higher personal allowances outlined above, and your tax code must reflect this.

5. Pay less council tax

Don’t forget, if you live alone you’re entitled to a 25% reduction on your council tax bill no matter how high your income. To apply for the discount, all you need to do is contact your local council. If you’re on a low income, and the value of your savings and investments are below a certain level, you may also qualify for Council Tax Benefit. You can check whether you may be eligible using this link.

If you’re already claiming the Guarantee Credit element of the Pension Credit, you may also be entitled to help with your council tax bill.

6. Avoid Inheritance Tax (IHT)

Inheritance tax or IHT is a charge payable on the value of your estate if it’s worth above a certain amount on death. IHT is levied at a rate of 40% on estates worth more than £325,000. Estates worth less than this amount - known as the nil rate band - escape IHT.

There are several IHT exemptions which you should learn about now. You can find out all about them by reading Avoid paying inheritance tax.

Under new rules, married couples and civil partners can double the IHT-free threshold to £650,000 when the second partner dies. This involves transferring any unused allowance on the death of the first spouse, or partner, to the second. This could be an effective way to reduce your IHT bill, but it’s a good idea to seek professional advice on IHT planning now.

7. Save with NS&I

Finally, you can save £15,000 tax-free in a three year index-linked savings certificate and another £15,000 tax-free in a five year index-linked savings certficate. These certificates pay 1% above RPI, which is currently 5.3%, and even though you don't have to pay tax on the interest you earn, these certificates won't count as part of your ISA allowance. If you need to access your money early, it is possible to do so and the interest penalty is relatively small. Read Earn 6.3% on your savings - tax-free! for more information.

Compare savings accounts at lovemoney.com

*Assuming you buy a level standard annuity with no spouse’s benefits which provides a fixed income each year.

More: Avoid Capital Gains Tax hikes | 3 vital steps to paying less tax