A new HMRC website has been designed to help people understand how tax works when they retire.
Whether you’re approaching retirement, already retired, or planning ahead, Tax Confident offers a wealth of practical information, videos, articles, and examples to help make the tax rules in retirement easier to follow.
From understanding how your State Pension is taxed, to learning about allowances for savings, dividends, and inheritance, Tax Confident provides clear answers to common questions.
The website also explains how tax is collected, including Pay As You Earn, Self Assessment, and Simple Assessment options, so you can manage your finances with confidence.
Here are answers to some questions you might have…
Getting ready for retirement
How will my tax be calculated in retirement?
In retirement, you might receive income from multiple sources such as your State Pension, workplace or private pensions, rented property, or self-employment. Some of your income is tax-free; this is known as your Personal Allowance, which for most people is currently £12,570 per year. Any income above that is taxed at rates depending on your total taxable income.
Does my State Pension count as taxable income?
Yes. The State Pension counts towards your total income, so it is taxable if your income exceeds your Personal Allowance. Your State Pension is paid without tax taken off and counts towards your Personal Allowance.
If you also have workplace or private pensions, interest from savings, or income from part-time work, the total may exceed your Personal Allowance. You only pay tax on the income above that allowance.
Will I still pay National Insurance?
No. Once you reach State Pension age, you won’t be charged National Insurance, even if you continue working.
How will my tax be collected?
Tax can be collected in three ways:
- If you are employed, tax is deducted through Pay As You Earn (PAYE) – this usually applies to work or private pensions too.
- If you are self-employed or have income from rented property, tax is paid via Self Assessment. Note that if your income from savings is more than £10,000 or you’ve received more than £10,000 in dividends, then you will need to complete a tax return.
- If you don’t have employment or private pension income and owe tax on your State Pension or other income (for example interest on savings), HMRC will send a Simple Assessment letter explaining how much you owe, how to pay and by when.
HMRC’s Tax Confident website explains each option and which is likely to apply to you.
Staying tax-savvy in retirement
Do I still pay tax if I work in retirement?
Yes. While National Insurance payments stop once you reach State Pension age, you may still pay tax on your total yearly income, including wages, self-employed income, State Pension, workplace or private pensions, and income from savings, investments, or rented property. You only pay tax on income above your Personal Allowance (£12,570 per year).
Do I pay tax on income from savings?
HMRC adds all income together. Interest from savings and investments counts towards your total income. In addition to the Personal Allowance, you may also benefit from the Personal Savings Allowance, which lets you earn some income from savings and investments tax-free.
What if I own shares or investments that pay a dividend?
Everyone has a dividend allowance, currently £500 per year. Dividends above this amount count towards your total income and may push you above your Personal Allowance.
If I sell an investment, what tax will I pay?
Selling certain assets, like a second home, valuable jewellery, or shares, may create a Capital Gains Tax (CGT) liability on the profit made. Certain allowances may reduce or eliminate the tax.
When a loved one dies
How will losing my partner affect my personal tax?
If your partner dies, you may receive money from their pensions, benefits, or inheritance. Some of this income may be taxable, so you should notify HMRC.
What is Inheritance Tax?
Inheritance Tax is charged on the value of your estate when you die, including property, savings, investments, possessions, and certain gifts made within seven years before death. Everyone has a tax-free threshold – currently £325,000. Anything above this is taxed at 40%.
Can I increase my tax-free threshold?
If you leave your home (or a share of it) to your children or grandchildren, you may qualify for the Residence Nil Rate Band, worth up to £175,000. Combined with the £325,000 threshold, this could allow you to pass on up to £500,000 tax-free.
Can I give gifts while I’m alive without paying tax?
You can give away £3,000 worth of gifts each year without them being added to your estate. Small gifts of £250 per person are also exempt from Inheritance Tax.
Will I have to pay Inheritance Tax if we were married or civil partners?
No. Transfers between spouses or civil partners are fully exempt from Inheritance Tax, regardless of the estate’s value.
What if we lived together?
If you were not married or civil partners, you do not get the spousal exemption. Any inheritance above £325,000 may be subject to Inheritance Tax.
