Making most of personal allowance in year of retirement

lucyandthomas

Hi All

My husband is planning to retire on 7 June 2027. The aim is for him to utilise his personal allowance of £12570 before he stops. He is particularly keen to do this as he is currently 52, and will be affected by change in national minimum pension age so will miss out on a few years of tax-free cash as can’t access pension). His salary is £100,000, and he has a salary sacrifice pension. By working 1 week in June, he’ll get 14 days holiday allowance instead of 13.

If he works until 7 June 2027 and assuming no pay increase, his salary would be around £18,500 (gross and before any SS). Am I right in thinking he could sacrifice a total of 6k of this over the last three pay runs (obviously not much in June, as he’ll only work a week), leaving around £12,500 paid, which will ultimately be tax free. Does this sound right?

Many thanks

GunJack

He will pay tax on PAYE as he's earning it, he may be able to reclaim the tax paid in-year by contacting HMRC.

eskbanker

The aim is for him to utilise his personal allowance of £12570 before he stops

As above, the calculation of tax liability is based on the whole tax year, and for most, the allowance will be allocated evenly at about £1048 per month, so tax will be deducted via PAYE on that basis as usual, rather than him literally being able to use the full allowance in the first three months.

However, your (his?) concern appears to be more about minimising tax liability rather than simply ensuring use of his allowance, and the full year tax position will depend on whether he'll earn any other taxable income beyond the allowances for the likes of savings and dividends, etc, but yes, if his total taxable income falls within these then he shouldn't ultimately have any tax liability once it's all worked out in 2028.

lucyandthomas

Thanks both. We realise that he’ll be taxed as normal while working, and will get the overpayment back in due course. There is no plan for him to earn anything more in the 27/28 tax year, his savings interest will be around £1000 so no issue there, and he doesn’t receive any dividends.

The main objective is to earn enough to get full use of his personal allowance, and with the bank holidays in May, he may as well be paid for them. It’s looking like he could leave on 7 June with 6 k (+7% from employer) more in his pension having had 14 days annual leave, or leave mid May (ignoring second bank holiday) with minimal pension contributions in 27/28 tax year and having had 13 days annual leave. We were trying to decide the best option, but I seem to be answering my own question. That’s a lot more pension and a couple of extra days off for an extra 3 weeks work.

Easter is in March 2027 so doesn’t affect anything.

Apologies for my ramblings - correct me if I’m wrong, but I think we’re a bit clearer now.

Thanks

hugheskevi

A few things spring to mind:

(1) Will he be able to extract all of his pension after age 57 within basic rate band, taking into account fiscal drag? If not, he might be better taking it now and paying 20% income tax and 8% NI than putting it into a pension and taking 25% tax free and paying 40% on the taxable part. Although if he also gets some or all of the employer NI saving passed on it would still probably be best in the pension.

(2) He can submit a P50 online when he has his P45 and get the extra tax paid through PAYE refunded via cheque, which should all be sorted within a couple of months of leaving. A special challenge of that is actually cashing the cheque, as few banks accept cheques over £5,000 through app photos so an old-fashioned visit to branch may well be required.

(3) He might be able to milk a few extra pounds out of gaming employee National Insurance by increasing salary sacrifice in some months down to the Primary Threshold to get 8% employee NI saving, and reducing it to the minimum in other months to maximise the amount of NI paid at 2%.

(4) An alternative optimisation would be to aim to fully use basic rate band up to £50,270 which would perhaps mean a leaving date of Monday 7th September (getting the August Bank Holiday, the September NI allowance, and paid for a weekend). If he works in an area where work is quieter over the summer months that could be attractive, but not if June is a fixed target.

(5) If he is really keen to get some taxable income before age 57, he might consider seeking work again in April 2028, and claiming some contributory and taxable Job Seekers Allowance whilst he does that.

(6) After April 2028, regular saving accounts might become quite attractive, given the higher interest and unused Personal Allowance. In conjunction with a flexible ISA you can get whatever the best rates are inside or outside an ISA without losing ISA allowance.

All just some of the things I mused about, having left work a few months back, and so in a similar situation.

lucyandthomas

Thanks Hugheskevi - feeling reassured after reading your post, as we’d thought of most of your points.

May/June feels a long way off, so September may be pushing it that bit too far!

Already working the system with ‘lumpy’ salary sacrifice, and just starting to open regular savers that will mature once he’s got a £1000 allowance. We’ve got a handful of flexible cash ISAs, and use the funds in our (fully) offset mortgage to ensure these are fully maxed at tax year end.

Didn’t know about the P50, so thank you for that. Also Jobseeker’s Allowance - he’s not planning to work again, but you never know.

Thanks again