MORE than 8million UK pensioners will see their income hit by Labour's ‘retirement tax', but there are three ways you can minimise the impact on your finances.
Earlier this week Flying Eze exclusively revealedby 2027/28 under government plans.
The government's decision to continue the freeze to tax thresholds will couple with high inflation and lead to millions of households having to start paying in the next three years.
Data provided bythrough a freedom of information (FOI) request made by wealth manager Quilter and shared exclusively with Flying Eze, showed nearly 18million people will be forced to pay income tax.
Of those, 8.2million will be over the age of 60 and paying tax on their income for the first time.
Normally, tax thresholds increase every year to account wage increases in line with, as this stops people being left worse off in real terms.
But in April 2021, the then- government decided to freeze all tax thresholds, and these are now due to stayfrozenuntil 2028.
The freezing of thresholds means more people must pay tax, or pay tax at a higher rate.
For pensioners the triple lock – which ensures the state pension rises by the highest of, 2.5% orwage growth – has seen payments increase, but tax thresholds have not risen alongside.
As a result of steep inflation driving up pension rates the number of pensioners set to be dragged into paying income tax has soared as a result.
Originally, the predicted that around 1.3million people would be dragged into paying income tax, with a further 1million people paying at the higher rate.
The latest figures show this has leapt up to almost 30million people affected in total, with 18million starting to pay tax – 8.2million of who will be pensioners.
But, there are ways those in their retirement can minimise the impact of the increase.
Laura Suter, director of personal finance at AJ Bell, and HelenMorrissey, head of retirement analysis at Hargreaves Lansdown, have shared their tips.
Consider putting your savings in an ISA
An is a type of savings account in which you can save up to £20,00 each year tax-free.
But it's not just the interest you earn on them that is tax-free, but any withdrawals too.
Laura explained using an example of someone withdrawing 4% a year from a £100,000 ISA pot.
This would amount to £4,000 income each year earned tax-free compared to taking it out of a regular savings account which is subject to tax.
Laura said: “Pensioners looking to reduce their tax bill need to think about how they can maximise their tax-free income.
“For example, any withdrawals made from their ISAs will be free of any tax, so they can use that pot of to boost their income without impacting their tax bill.”
Make the most of your other pensions
It's tempting to take out your whole private or workplace pension when you reach retirement and put it into a savings account.
But do this and you'll end up paying income tax on any sitting in taxable accounts.
Instead, you can actually take out 25% of the value of the pension tax-free.
You can either do this as a lump sum or in smaller gradual amounts to top up your without being taxed on it.
Laura said: “You can take ad-hoc amounts or regular withdrawals from the pot to use your tax-free amount gradually.
“This is a great way of boosting your income but not increasing your tax bill.”
Marriage Allowance
If you are married or in a civil partnership you might be able to reduce the amount of tax you pay overall .
It lets you transfer some of your personal allowance to a spouse if you are a non-tax payer and they are a basic rate taxpayer.
Allowance for this current tax year is worth £252
Helen Morrissey, from Hargreaves Lansdown, said: “The non-taxpaying partner can transfer £1,260 of their Personal Allowance to their partner.
“This reduces their own personal allowance so it might mean they end up paying some tax but the boost to the taxpaying spouse means you pay less tax overall as a couple.”
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