tax on retirement

dd95

hi all,


reading a few posts on here that mention what tax bracket you'll be on after retiring

what is this in relation to as you won't have a salary when retired?

undoubtedly a stupid question but i presume this means income from investments? could anyone explain?

newatc

Not only investment income but money from other sources most obviously pension income (state and/or company and/or personal).

DairyQueen

In retirement, the biggest taxable income for most of us is derived from pensions. Whether defined benefit, defined contribution. SIPP, annuities or state pension, all is taxable. Add to that, income from (unwrapped) savings and investments. It all adds up and is all taxable.

Many try to take pension benefits at a lower income tax rate than applied when they made the contribution. Tax-free (at, say, 40%) on the way-in but only 20% (or tax free) on the way-out. That's the big win.

dd95

so what/how much would dictate what tax you pay?

if the value of investment income/pension exceeds 50k per year would mean you would pay 40% tax?

dd95

hi dairy queen, thanks for that. It's therefore imperative then to max out s and s isa in the interim (to take into account cap growth and to then get enough for a decent income on retirement) as this income won't be taxable as its from an isa?

Dazed_and_confused

It isn't that simple. There is no tax uplift with an ISA but there is no tax to pay on aything taken out.

With a pension you might end up with say £1,000 in your fund which has only actually cost you £600, or less in some circumstances but when you take something out 75% of it is taxable.

if the value of investment income/pension exceeds 50k per year would mean you would pay 40% tax?

The £50k figure doesn't apply if you are Scottish resident for tax purposes, it's significantly lower. And the tax rates are slightly higher.

There are also different tax rates for taxable savings interest and dividend income so, ignoring ISA's, you can currently have £20,500 taxable income in the current tax year and have no tax to pay. Providing you have the right mix of pension/wages, savings interest and dividend income

dd95

i think your username is apt for how I'm feeling right now!

Dazed_and_confused

You would have to do well to hit it just right but if you somehow managed to have
Pension of £12,500
Interest of £6,000
Dividends of £2,000
Then you would have £8,000 income above your Personal Allowance which needs to be taxed. But it would be taxed like this,

£5,000 interest x 0% (savings starter rate)
£1,000 interest x 0% (savings nil rate)
£2,000 dividends x 0% (dividend nil rate)

dd95

thanks for that, i don't envisage i will have any interest income as, outside of an isa, i think i would probably look to invest in an index fund so would receive dividends payments instead

triplea35

Dazed_and_confused wrote: »

You would have to do well to hit it just right but if you somehow managed to have
Pension of £12,500
Interest of £6,000
Dividends of £2,000
Then you would have £8,000 income above your Personal Allowance which needs to be taxed. But it would be taxed like this,

£5,000 interest x 0% (savings starter rate)
£1,000 interest x 0% (savings nil rate)
£2,000 dividends x 0% (dividend nil rate)

Could you not also consider and utilise Capital Gains Allowance of £12,000?

Dazed_and_confused

If you had capital gains yes.

If you received Marriage Allowance from your spouse you could have an extra £3,333 in dividend income without having tax to pay.

If you claim Married Couples Allowance you could be getting over £30k with no tax to pay providing the extra was dividend income.