No one likes to pay more tax than necessary, least of all pensioners. So once you reach retirement, it is important to organise your affairs as tax-efficiently as possible to maximise your income. Here are ten things to know about tax when you retire.

1. Know your allowances
One of the good things about reaching 65 is that you qualify for a higher personal tax allowance, so you can receive more income on which you do not have to pay tax. On 6 April this year, this allowance rose to £7,280 for those aged 65 to 74 and £7,420 for people 75 and over.

2. Maximise your allowances
One mistake that older couples sometimes make is to have all or most of their private pensions and savings in one partner’s name, typically the husband, which means that only one tax allowance is being fully utilised. By putting more savings into the other partner’s name so that his or her personal allowance and lower-rate tax band can be used, you could reduce an overall tax bill.

3. How much tax?
The first £2,150 of income above your personal allowance in the current tax year is taxed at 10 per cent. However, most forms of income are paid with higher amounts of tax already deducted. For instance, interest on bank and building society accounts is paid after 20 per cent tax, and 22 per cent tax is taken from retirement annuities. These investments do not include the same security of capital that is afforded by a deposit account.

4. Don’t overpay
The Low Incomes Tax Reform Group says that many pensioners overpay tax because they do not understand that it is being deducted from their annuities. If you think that you have been overpaying tax on your pension or savings, you may be able to claim repayments for the past six years. To reclaim tax, form R40 would need to be completed, which is available from your tax office. If you are a non-taxpayer, you could receive future income free of tax by completing form R85.

5. The right type of savings
If you are a non-taxpaying pensioner, not all types of savings are suitable. Tax cannot be reclaimed on share dividends, for example, or on insurance products such as guaranteed income bonds.

6. Over the limit
If your retirement income is more than £20,100 in the current tax year, you will lose £1 of your tax-free age allowance for every £2 of income over this limit until you receive the normal personal allowance of £5,035. This occurs at £24,590 for over-65s and £24,870 for over-75s.

7. The age allowance trap
Having income between the lower and upper limits for age allowance purposes is particularly bad news because you will effectively pay a tax rate of 33 per cent. This is made up from the basic rate of 22 per cent, plus 11 per cent from the loss of the age allowance.

8. How to avoid the trap
If you have income from savings that falls within the age allowance trap, there may be an escape route. Individual Savings Accounts can be useful because the income is not subject to tax and is not counted as part of your income for age allowance purposes.

9. Going for growth
If you put money in growth-orientated investment funds, you can use some of the gains to supplement your income. You could take capital gains up to £8,800 free of tax in the current tax year.

10. Insurance bonds
It is possible to withdraw up to 5 per cent a year for 20 years from insurance bonds without its inclusion in your income for age allowance purposes. However, careful timing is required when you cash in your bond so not to affect your age allowance.

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