May 1, 2024
As the State Pension rises, but Income Tax bands remain fixed, many pensioners may find themselves unexpectedly looking at an increased tax bill this year.
Thanks to the Triple Lock, April 2024 sees an 8.5% increase in the State Pension, following a 10.1% increase in April 2023. This means that a full UK State Pension is now slightly over £11,500 a year.
With the Income Tax personal allowance remaining static at £12,570 a year, though, this increased State Pension may bring an unexpected downside in the form of a higher income tax liability this tax year. Although for some pensioners, the tax-free allowance may be higher (if, for example, you are reliant on savings income), your income is potentially more likely to incur tax, and you may find that there is a tax code change on income from a pension or annuity this year.
Using your allowances
Whether you are already retired or approaching retirement, it’s helpful to make sure you are familiar with all the allowances that can help you to earn income from your cash and shares without paying tax.
Some of these may look fairly small, but we are firmly of the opinion that every little helps, and that, whatever your income level, you would be wise to make full use of any help the tax system offers you!
Personal savings allowance
Currently, basic rate taxpayers can earn £1,000 of interest on savings before paying tax. This allowance drops to £500 for higher-rate taxpayers, and additional-rate taxpayers are not entitled to any personal savings allowance.
Extra savings and dividend allowances
For those whose general taxable income is below £17,570, there is an additional ‘starting rate’ of 0% on savings income up to £5,000.
You are also able to use your dividend allowance of £500 (reduced in the 2024/25 tax year from £1,000 in the 2023/24 tax year) to receive tax-free income from shares.
Sheltering your savings from tax
Using your £20,000 a year ISA allowance can help you in several different ways. Understanding the most appropriate combination of savings for you is vital to ensure you make the most of the potential – so it’s a good idea to discuss this with an IFA.
For example, you could use part of your allowance on a Cash Individual Savings Account (ISA), for tax-efficient interest. However, you must bear in mind that you only have one £20,000 allowance in any given tax year, so using a Cash ISA limits how much you can put into a Stocks and Shares ISA.
Stocks and Shares ISAs are a tax-efficient way to invest for the long term, and can help to supplement your pension income.
Your personal circumstances and objectives will influence which option works best for you, and an IFA can help to guide you towards a decision.
Planning ahead for pension withdrawals
If you have an invested pension pot that allows you to take out a lump sum in cash on reaching retirement age, you need to consider the tax implications, as this case may not come entirely tax-free. Added to your other income in a given tax year, this could push you into a higher Income Tax band, so you could consider phasing your pension income by taking the tax-free lump sum (25%) and spreading further withdrawals over multiple tax years.
Whatever type of pension or other investment you are interested in, and whatever your level of investment knowledge, a professional IFA can help you to navigate the financial world with greater confidence, guiding you towards the decisions that will set you on the path to a more secure financial future.
Efficient distribution of assets
If you’re married or in a civil partnership and either you or your partner has a lower income (and therefore lower tax liability), there may be opportunities to split income-generating assets (either by holding them in joint names or by allocating them to the partner with the lower tax liability). This allows you to make full use of the tax-free entitlements for both partners.
Planning your finances for tax efficiency can feel like shifting sands, as the tax rules change. But remember that you’re not alone. The advice of an experienced IFA can save you a lot of time and give you more confidence that you are making informed decisions that are right for you.
At Talis IFA we pride ourselves on offering plain-speaking advice in plain English – helping our clients to navigate the financial world with greater confidence.
To get our help to plan for a more tax-efficient year, find an IFA here.
This article does not constitute tax or legal advice and should not be relied upon as such. A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age).
The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by interest rates at the time you take your benefits.
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