Once you reach the State Pension age, you will be able to stop paying National Insurance contributions. However, you will still be required to pay tax on any income over the amount of personal allowances to which you are entitled. The level of taxable income you receive can affect the amount of personal allowances you receive. If you continue to work or run a business after the retirement age, your tax affairs may be a little more complex.
Will you still pay tax when you retire?
To work out whether or not you will still be required to pay tax during retirement, you should add up all your taxable income, including your state pension and any other taxable benefits. Taxable income includes employment, self employment, state pension and a number of other benefits, such as bank interest, dividends, foreign income and income from property. The next step is to calculate the amount of personal allowances to which you will be entitled. If your income is more than the personal allowances, you will pay tax.
How to calculate tax-free allowances
These allowances are the amount of income you can receive without paying any tax. Unlike the basic personal allowances, your tax-free allowances following retirement will be based on your date of birth.
For those people who were born after 6th April 1948, the personal allowance amount is £10,000 and this amount will be reduced by £1 for every £2 received above £100,000. The tax-free amount increases to £10,500 for anyone whose date of birth is between 6th April 1938 and 5th April 1948. The income limit is £27,000, with personal allowances being reduced for any amount above this. For dates of birth before 6th April 1938, the allowances are £10,660 and the income threshold is £27,000.
Although the personal allowances are reduced by £1 for every £2 above the income limit, the allowances will never be less than £10,000 if you were born before 6th April 1948, unless your income exceeds £100,000.
Self assessment tax return
If you are in employment and have more than two personal pensions, in addition to the State Pension, you will be required to complete a self assessment tax return. If your income exceeds the threshold of £27,000, you will also need to complete a tax return.
Tax in retirement can be complex, which is why you may need professional advice if you are unsure, to avoid paying the wrong amount of tax.
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