Pensioners can earn £27,000 a year without paying penny in tax (2024)

Martin Lewis provides advice on marriage tax allowance

The UK tax burden has hit a 70-year high which sees even more of our hard-earned money going straight to HM Revenue & Customs.

Income tax thresholds have been frozen all the way through to 2028, dragging millions more into the taxman’s net as incomes rise.

This hits those of working age hardest but there is no escape for pensioners. More than eight million now pay tax after state pension age, up a quarter in just three years.

Yet with careful planning it is possible for pensioners to slash their annual tax bill, possibly to zero.

They have a range of options for fighting back, said Gary Smith, partner in financial planning at wealth management firm Evelyn Partners. "There's plenty you can do to cut your tax exposure and it pays to be proactive.”

Smith calculates that it is possible for a retiree to enjoy an income of £27,227 a year without paying a penny in tax.

They can do this by using allowances available to millions.

Some could earn even more tax free, because his figures do not include returns on savings and investments held inside the annual Isa allowance.

Even if you can’t take advantage of all of the following five tax-saving steps, using just one or two could reduce your exposure to HMRC.

1. Use your personal allowance. Everyone can earn up to £12,570 a year before paying any income tax.

Smith said: ”With the full new state pension worth £10,600 a year, pensioners can receive £1,970 of private pension income on top of that before hitting the allowance and paying tax on their retirement income.”

Check whether you are using your allowances to the full (Image: Getty)

2. Take your pension tax-free lump sum. Pension savers can take 25 percent of their pot free of tax but many don't realise that they don't have to do it all in one go, Smith said.

“To pay no tax, set your annual withdrawal at £2,627 gross. Of this, 75 percent, or £1,970, falls within the personal allowance. The remaining 25 percent, worth £657, can be taken from the tax-free element of the pot.”

This lifts your total tax-free income so far to £13,227 and there’s more to come.

3. Use your savings. Under the starting rate for savings, lower earning pensioners who get income of less than £12,570 a year can take £5,000 worth of savings interest a year free of tax.

Basic rate tax payers also qualify for the personal savings allowance, which allows them to earn savings interest of up to £1,000 a year before income tax kicks in. This lifts their potential tax-free income to £19,227.

4. Don’t forget the dividend allowance. Shares held outside of the tax-free Isa wrapper are liable to both dividend tax and capital gains tax, but only above a certain limit.

In the current year, investors can draw dividend income up to £1,000 free of tax and take capital gains of £6,000, too.

That could lift their total tax-free earnings to a potential £26,227 but Smith cautioned: “From next April, these allowances fall to £500 and £3,000 respectively.

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5. Online trading. Smith notes that everyone can also earn up to £1,000 tax-free from buying and selling on internet trading sites like eBay, under the trading allowance. This lifts the potential tax-free income total to £27,227 a year.

Couples can double most of these tax-free amounts by using both sets of allowances, he added. “Transfers of assets between married couples and those in civil partnerships do not trigger tax liabilities, allowing flexibility to achieve tax efficiency.”

Those who save or invest inside the £20,000 tax-free Isa wrapper can earn even more tax-free income, as all savings interest, dividend income and capital growth escapes HMRC’s clutches. “It pays to save as much as you can in an Isa,” Smith said.

More sophisticated investors can seek tax-free dividends from specialist investments such as Venture Capital Trusts and tax-deferred withdrawals from offshore investment bonds, he added.

Consider other options, too. For example, the Rent-a-Room scheme allows people to earn £7,500 a year free of tax from taking in a lodger.

Few will be able to benefit from all of these allowances, but make sure you know what’s out there. The tax savings may surprise you.

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