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State pensioners pay £24bn in tax: find out how to cut your bill

New analysis reveals pensioners are paying over £24bn to HMRC in tax

State pensioners pay £24bn in tax: find out how to cut your bill

Pensioners in Kensington & Chelsea and Westminster have annual tax bills exceeding £28,000, while those in Stoke-on-Trent pay just shy of £1,200, according to a new analysis. 

Figures obtained by insurer Royal London show that 6.87 million pensioners (including around 400,000 women over state pension age but under the age of 65) forked out over £24bn in 2015-16, the most recent tax year the numbers are available for.

That means state pensioners are paying an average of £3,522 a year to HMRC.

Which? takes a look at what pensioners are paying tax on, who’s paying the most and what you can do to reduce your income tax bill.

What do pensioners pay tax on?

The figures show that more than a quarter of taxpaying pensioners were still in paid work in 2015-16, with 1.52 million employed and 498,000 earning money through self-employment.

Of the total number of taxpaying pensioners, 6.78 million received a pension and 6.63 million earned income from property, savings interest, dividends or another source.

Which pensioners are paying the most tax?

Pensioners living in the London borough of Kensington & Chelsea had the highest average tax bill at a whopping £32,250.

Meanwhile, residents of Stockton-On-Tees and Stoke-On-Trent had the lowest typical tax bill at £1,192.

You can use the map below to find out how much tax pensioners are paying in your area, or search for your local authority using the table search bar.

How pensioners can save on tax

There are a variety of ways to pay less tax if you’re a pensioner. Here are 11 tips to get you started.

1. Check your tax code

Your tax code is made up of a series of numbers and letters generated by HMRC which tell your employer or pension provider how much income tax to take from your pay or pension.

For 2018-19 most people will have the tax code 1185L, this means you can get an income of up to £11,850 before you have to start paying tax.

If you’ve been put on the wrong tax code you could be paying too much or even too little tax, so it’s important to check and get it changed.

Find out more: Understand your tax code

2. Stop paying National Insurance

Everyone that works in the UK has to pay National Insurance contributions which go towards benefits, but only until they reach state pension age (for now at least).

Those that carry on working beyond their state pension age don’t have to pay National Insurance class 1 and class 2 contributions.

You can stop these being taken off your wages by showing your employer your proof of age or getting in touch with HMRC to get a letter that confirms you’ve reached state pension age.

If you’re self-employed you can also stop paying class 4 NICs, but only in the tax year after you reach state pension age (as class 4 NICs are based on a tax year).

Find out more: National Insurance rates

3. Consider deferring your state pension

If you plan on working for longer, it may be worth delay taking your state pension gets to reduce your tax bill and benefit from a boost later on.

That’s because the money you get from your state pension will be added to your total earnings, so it could push you into a higher tax bracket.

But if you put off claiming it the government will increase the amount it pays out, and you can decide to defer it even if you’ve already started drawing it.

The amount you get varies depending on when you qualified for the state pension.

If you reached state pension age before 6 April 2016 you’ll get a 1% increase for every five weeks you put off claiming it, which works out as a 10.4% boost for every full year.

If you reached state pension after 6 April 2016 you can get an annual rate of 5.8%.

Find out more: Deferring your state pension

4. Get paid in dividends

Dividends are a great way to generate a regular income from your investments.

In this tax year, you don’t need to pay any tax on the first £2,000 you receive in dividend income.

After this tax-free, dividend allowance is used up, basic rate taxpayers have to pay 7.5%, higher rate taxpayers 32.5% and additional rate taxpayers have to hand over 38.1%.

It’s worth noting that the tax on dividends is lower than the tax rate applied to the money you earn from work or a pension.

So even after your dividend tax-free allowance is used up, you may still benefit with a lower tax bill by generating an income from your investments in this way.

Find out more: Dividend tax

5. Use the personal savings allowance

The introduction of the personal savings allowance in April 2016 allows basic rate taxpayers to earn up to £1,000 in savings interest tax-free (or £500 if you are a higher rate taxpayer).

The interest you earn in a current account, easy access, fixed-rate bond, regular saver, credit union but it also applies to some investments including government or corporate bonds and peer-to-peer lending.

Find out more: Personal savings allowance and tax on savings interest

6. Don’t forget about Isas

The introduction of the personal savings allowance might have dampened your interest in a cash Isa, but they’re still worth going for.

You can save or invest up to £20,000 in a cash, stocks & shares or in innovative finance Isa in 2018-19.

It’s still worth saving into an Isa as your pot remains tax-free no matter how much interest, dividends or capital growth you earn, so they’re good for long-term savings.

Plus the interest you earn in an Isa doesn’t count towards your personal allowance like it does with other savings which can push you into a higher tax bracket.

Compare Isas on Which? Money Compare

7. Get married

The marriage allowance gives married couples and civil partners born after 6 April 1935 the chance to save on tax.

It allows a partner earning less than £11,850 a year to transfer up to £1,190 of their personal allowance to their higher-earning spouse.

The government estimates this could reduce your tax bill by up to £238 in a year, but many eligible couples aren’t claiming it.

Find out more: Marriage allowance explained

8. Use the new tax-free property and trading allowances

If you make money from property or a side hustle, such as selling on Ebay, remember to take advantage of the new trading and property allowances introduced in April 2017.

You can earn up to £1,000 from renting out a property and up to £1,000 from self-employment, casual gigs like babysitting or hiring out personal items like a power tool tax-free.

Just bear in mind that you won’t be able to benefit from the property allowance if you are already using the rent-a-room scheme, which allows homeowners to take in a lodger and earn up to £7,500 of rental income tax-free.

9. Offset your expenses

If you’re self-employed or a landlord, you may be able to offset certain business expenses before calculating your tax bill.

Those who are self-employed and work from home, for example, are able to claim for the cost of lighting, heating, insurance and mortgage interest.

Find out more: Self-employed: tax allowable expenses

Landlords meanwhile can deduct costs like council tax, gas, electricity, contents insurance, ground rents, service charges and letting agent fees.

Find out more: Expenses and allowances landlords can claim

10. Plan how to withdraw pension savings

The pension freedoms introduced in April 2015 allow anyone aged 55 or over to access their pension savings.

But you should plan how to withdraw your savings and avoid taking your whole pot out in one go as you could be hit with a huge tax bill.

You are able to take 25% of your pension pot as a cash lump sum or make multiple withdrawals that are 25% tax-free. But the rest will be taxed at your marginal rate.

Use our pensions tax calculator to work out how much you’ll pay on a withdrawal.

11. Watch out for emergency tax on your pension

The tax applied on pension withdrawals is deducted at source rather than through a self-assessment tax return.

So if your scheme provider doesn’t know your tax code you will be put on an emergency tax code, which means you will pay more than you need to.

HMRC will eventually refund the extra money taken, but the process can take a while unless you actively make a claim.

Find out more: Tax on pensions

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