It’s fair to say that when you reach retirement, tax should be the least of your financial worries. The move from earning money from paid employment or self-employment is usually associated with a corresponding fall in income levels, and therefore less tax to pay.
It helps too that you stop paying National Insurance contributions when you reach State Pension age, reducing the overall tax burden.
Despite what should be untroubled years from a tax perspective, new research has found that retired households are shouldering a hefty income tax burden. The research, carried out by equity release adviser Key, found that retirement households are paying an average of 31% of their income in direct and indirect taxes each year.
Incidentally, I remember when my late father retired around 1997 and him remarking on how much more he noticed the impact of tax on his company pension compared to the tax that was deducted from his salary!
It means 7.1 million retired households are paying an average tax bill of nearly £8,000 a year, contributing a combined £59bn to the Treasury. According to the analysis, the average gross annual income for a retired household in the UK stands at £25,051. They have a post-tax income of £17,593, which means an average tax bill of £7,971, or 31.8%.
Retired households pay less tax than working-age families, who have an average tax rate of 34.8%. However, working-age families have much higher income levels than retired households, at an average of £50,358 a year.
It’s the least well-off retired households who appear to be suffering the highest tax burden. Key found that the lowest-earning 10% of retired households have gross incomes of £8,725 and post-tax incomes of £4,527. This equates to a total tax bill of 48%.
They also discovered that the highest-earning ten per cent of retired households have gross incomes of £66,212 and post-tax incomes of £46,523, which equates to a total tax bill of 30%.
For the average retired household, Value Added Tax (VAT) is the most significant tax bill, with a total of £2,278 paid in VAT each year. In second place is income tax, at an average of £2,050 a year. Council tax comes in third place, at an average of £1,261 a year.
Will Hale CEO at Key said:
“Paying tax does not stop when you stop working and retired households have to keep on budgeting and planning ahead on how to pay income tax and council tax bills.
“The average bills from direct and indirect tax that retired households face take a substantial bite out of incomes underlining how important it is to consider all potential sources of income in retirement.”
The famous quote usually attributed to Benjamin Franklin that in this world nothing can be said to be certain, except death and taxes, suggests little can be done about the level of taxes paid in retirement.
There are, of course, opportunities for tax planning at all stages of life, with careful use of allowances and reliefs, which can help reduce your tax burden in retirement.
Please don’t hesitate to get in touch to find out more.