A person’s retirement income may be liable for income tax, as earnings from the state pension, private pensions, and any part-time work could take them over the threshold.
Financial advice group Kellands Hale wrote in an article on the moneyfacts.co.uk website that is “invaluable” for people to think about being tax efficient in the decade leading up to their retirement.
Britons pay tax on any annual earnings above £12,570, and with the recent rise in the state pension, a person on the full new state pension only needs to earn around £2,000 more before they start paying income tax.
The state pension increased 10.1 percent this month, with the full basic state pension now paying £156.20 a week while the full new state pension is £203.85 a week.
The advice group warned Britons need to “constantly evaluate” their tax liabilities to avoid a large tax bill during their retirement.
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Kellands Hale pointed out that older Britons need to think about inheritance tax and capital gains tax in their tax planning.
Capital gains tax applies to the increase in value of an asset such as a house or stock and shares, when they are sold on.
The threshold for paying the tax recently halved from £12,300 to £6,000 and is set to go down again to £3,000 next year, with tens of thousands of Britons being hit by the tax for the first time.
Inheritance tax is another aspect of a person’s finances that may require some advanced planning.
The 40 percent tax applies to any total assets a person inherits, above £325,000 from a single person or above £650,000 from a couple.
A successor can benefit from an additional residence nil-rate band if a main home is being passed on to a person’s children or grandchildren, of £175,000 for single people and £350,000 for couples.
One way for an individual to reduce their inheritance tax liability is to invest in pensions as these are not considered part of a person’s estate for inheritance tax purposes.
People can also give away gifts to reduce the size of their estate. A person can give away up to £3,000 each year divided among any number of people.
An individual can also give away any number of gifts up to £250 to different people tax-free. There is also the option to give away a larger amount but they will have to survive for seven years for the amount to avoid the tax.
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