Protecting as much of your hard-earned cash as possible from HMRC

Many retirees will get a combination of income from their pension and from their investments and property holdings. However, they are subject to the same tax rules as someone earning that income when they are employed.

This means once you hit an income of £150,000 you will start to pay tax at 45%, whether that’s from earnings or from investment income, but a sneaky tax quirk means that you’ll pay a much higher tax rate once you hit £100,000 of earnings too.

Anyone who has income of more than £100,000 will see their personal allowance reduced, which is the amount they can earn tax-free each year, currently £12,570. For each £2 your income is over £100,000 you will lose £1 of your personal allowance, until it’s entirely lost when your income is £125,140. This means your effective tax rate from £100,000 to £125,140 is 60%.

But there are ways to legally reduce the tax bill on your investments once you hit this band, or just to reduce the amount of tax you’ll pay at 45%.


Make sure as much money is sheltered from tax as possible

Regardless of your income tax rate, any income you earn in your ISA is tax free. Anyone can put up to £20,000 of money into an ISA each year, so a couple has the ability to shelter £40,000 a year from the taxman.

You can withdraw the income you get paid from your investments entirely tax free, as well as taking lump sums from your ISA to provide an income, tax free.

For someone with a £100,000 ISA that generates 5% income, that means you can earn £5,000 entirely tax free. You could then also take £10,000 out of the pot to use as income for the year, and pay no tax on that too.

Transfer high income investments to your spouse

This method requires two things: that you have income-producing assets outside of an ISA and that your spouse is in a lower tax bracket to you. If you have investments that produce a lot of income you could transfer them to your spouse. Ideally, they could put them in their ISA, if they have any of their annual limit left and then no tax is due on them. Alternatively, even if they do pay tax on the assets it will be at a lower tax rate. No capital gains tax would be due on the transfer, as transfers to a spouse are exempt.

Put money in your pension

If you’ve just tipped over £100,000 of income you could pay money into your pension to reduce your tax bill. If you contribute to a pension it effectively reduces your taxable income and so could pull you below the £100,000 limit.

You’ll get tax relief at 45% on the pension contribution, but the effective cost to you is even lower, as that money would have been taxed at 60%.

For example, if your income is £110,000 you could put £10,000 into a pension and that would reduce your taxable income back to £100,000 and mean you don’t fall foul of the 60% marginal tax rate.

You just need to check two things: first, that you haven’t already paid in the maximum into your pension (which is £40,000 for most people but drops to £4,000 for those who have already accessed their pension) and second that you have enough earnings (from employment or being self employed) to make a pension contribution.

This is because you can only contribute to a pension up to the amount you earnt that year. For example, if your employment earnings were £10,000 in a year, and the rest was income from investments and property, you’d only be able to put £10,000 into your pension that year.

Shift your income to capital gains

Lots of retirees focus on income-producing investments, but these will be taxed at income tax rates. Instead, if the investment produces a capital gain it will be subject to capital gains tax, which is lower.

An additional rate-taxpayer would pay 45% tax on their income but only 20% on their capital gains (or 28% if its from property). What’s more, everyone has a capital gains tax free allowance each year, which is currently £12,300 per person. Clearly you need to think about the investment and risk implications of switching your investments, but it’s worth considering.

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