Taxation in retirement – what you need to know

On reaching State Pension age you no longer pay National Insurance contributions, but you don't automatically stop paying Income Tax. Taxable income includes that from a State Pension and if this is more than the tax-free allowance, you will still be obliged to pay tax.

HMRC may have already contacted you to help work out if you are still required to pay tax. A P161 form should have been sent to you to fill in, which HMRC will then use to calculate the correct rate of tax to be paid and ensure that you receive any age-related allowances you may be entitled to. If you are within a month of reaching State Pension age and have not received a P161, it is recommended that you download from the HMRC website directly.

You can, of course, work out for yourself whether or not you are still considered a taxpayer. To do this you must:

• add up all your taxable income

• work out your tax-free allowances

• take your tax-free allowances away from your taxable income

Adding up your taxable income

Not all income is taxable. Here are some of the most common forms of taxable income:

• all pension income

• employment /self-employment income if you keep working

• almost all bank and building society interest

• dividends (income from shares)

• income from property after expenses, but not the first £4,250 if you rent out a room in your house

• income from abroad (overseas pensions have a 10% deduction so you are only taxed on 90% of the total amount

• some benefits, including Carer's Allowance and, in some cases, Incapacity Benefit

Those who are married or in a civil partnership and receive taxable income from property or investments held in joint names, will usually be treated as receiving half the income each, and so tax for the individual is only paid on their half. Those not married or in a civil partnership count only their share of any joint income.

Some common forms of non-taxable income are:

• Pension credit

• Working Tax Credit and Child Tax Credit

• income or interest from an Individual Savings Account (ISA), a Personal Equity Plan (PEP), or a Tax Exempt Special Savings Account (TESSA)

• interest from National Savings Certificates

• interest and bonuses from a Save As You Earn (SAYE) scheme

• Premium Bond and National Lottery winnings

• certain benefits, including Cold Weather Payments, Attendance Allowance, Income Support and Disability Living Allowance

• lump sum pension payments (but not lump sums from deferring a State Pension or foreign pensions)

Adding up your tax-free allowances

Below is a table detailing the current personal allowance rates for 2011-12:

Personal Allowance rates

2011-12

Income limit

Basic amount for someone under 65

£7,475

none

Age 65-74

£9,940

£24,000

Age 75 or over

£10,090

£24,000

Going forward

If your overall taxable income is greater than your tax-free allowance, then you are still legally a taxpayer and it is your responsibility to contact your Tax Office if you are not already paying tax.

Additional allowances such as Married Couple's Allowance and Maintenance Payments Relief, if applicable, may reduce your bill still further.

If you would like more information, please contact your usual adviser.

Source: HMRC