If you’re heading towards retirement you may be uncertain about how you will be taxed once you give up work. This isn’t too surprising considering (for most people) it’s the first and only time you’re going to retire.
Generally speaking, retired people are taxed on their income in exactly the same way as those in work. However, because the amount and source of income in retirement is different, for many people the amount of tax they pay (in monetary terms) is lower once they’ve left full time employment.
National Insurance
The one element of tax on income that does change when you get older is national insurance. Once you reach state pension age (66 in 2023/24), you no longer have to pay national insurance, regardless of whether you carry on working or retire.
It therefore follows that you don’t pay NI on state pension income. Even for those who retire before state pension age, there is no national insurance to pay on withdrawals from personal pensions, annuity payments or income from final salary pensions.
There is also no national insurance to pay on investment income or savings income
If you have income from Buy to Let property you may have to pay national insurance, depending on how much you receive and whether you are classed as a professional landlord. I’d recommend that you speak to an accountant if you are unsure.
Income Tax
The tax-free personal allowance and income tax rates for retired people are exactly the same as for those who work.
The state pension is taxable, although for the majority of people the amount of state pension they receive will be less than the personal allowance, which is £12,570 for 2023/24. All personal pension, annuity and final salary income is taxable, and if the income from these sources pushes your total income above £12,570 then you’ll pay tax on the excess.
All pensions are paid via the PAYE system, and tax will be deducted by the pension provider and paid to HMRC on your behalf, so for basic rate taxpayers there shouldn’t be anything else to do.
For those with investment income, any dividends you receive are subject to tax at the dividend rates, and for savings (and fixed interest investments) any interest is taxable at standard income tax rates.
Everybody gets a dividend and savings allowance on top of the standard personal allowance. For 2023/24 the dividend allowance is £1,000 and the savings allowance is also £1,000 (reducing to £500 for higher rate taxpayers). You may also be eligible for a further £5,000 in savings allowance, depending on your other income.
The profits made from renting out property are taxable at the standard rates of income tax.
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