Recent figures show that millions of retirees are choosing to return to work for various reasons. While this decision can offer benefits, including supporting your wellbeing, it can also add complexity to your tax situation. If you’re considering working after retirement, here are some key tax factors to keep in mind.
A Legal & General study revealed that 2.8 million UK workers over 50 have returned to work after previously retiring.
While financial reasons motivated 37% of retirees to return to work, other factors played an equally important role. 62% cited the desire to stay mentally active as a key influence, and 32% said they sought a sense of purpose through work.
Notably, only 3% plan to return to full-time employment. Most prefer to strike a balance between work and personal life, opting for part-time or seasonal work that aligns with their other goals.
If you’re thinking about returning to work in some capacity after retirement, here are two important tax considerations to keep in mind.
You may need to consider multiple sources of income when calculating Income Tax
When working after retirement, managing your Income Tax liability becomes more complex if you have multiple income sources. It’s important to factor in all of your income streams to calculate your tax accurately.
You may need to account for income from:
- Employment
- State Pension
- Defined benefit pensions
- Defined contribution pensions
Since Income Tax is calculated on your total income, it’s important to consider how all your income sources, including employment, pensions, and other earnings, add up. Without careful planning, you could unknowingly cross tax thresholds and face an unexpected tax bill.
To manage this, you might choose to defer your State Pension or temporarily pause withdrawals from your personal pension, helping to keep your total income below the higher- or additional-rate tax thresholds.
There are also other ways to supplement your income without increasing your Income Tax liability. For instance, you could access savings or investments held in an ISA. A financial plan can help you explore these options and determine what works best for your situation.
The amount you can tax-efficiently contribute to your pension may be lower
One advantage of returning to work is the opportunity to boost your pension savings. By increasing your contributions now, you could enhance your financial security and enjoy a more comfortable lifestyle in the future.
In the 2024/25 tax year, you can typically contribute up to £60,000 to your pension and benefit from tax relief, making pension saving a tax-efficient option.
However, if you’ve already accessed your pension for flexible income or purchased an annuity, you may have triggered the Money Purchase Annual Allowance (MPAA). This limits your tax-efficient contributions to £10,000 for the tax year.
Pension contributions that exceed the MPAA will incur a tax charge, so it’s essential to know if you’re affected and to monitor your contributions throughout the tax year.
The MPAA is typically not triggered if you’ve only taken a tax-free lump sum or accessed a small pension pot worth less than £10,000. However, it’s important to confirm this before making further pension contributions to avoid an unexpected tax bill.
A tailored financial plan could help you manage your overall tax liability
Your personal circumstances will influence your tax liability and the allowances available to you. A tailored financial plan can help you manage taxes efficiently on your income, whether you’re fully retired or working after retirement.
You might also need to consider other taxes, such as Capital Gains Tax if you’re selling assets or investing outside of a tax-efficient wrapper. A bespoke financial plan can assist in minimising these taxes, ensuring your assets stretch further to meet your retirement goals.
Please get in touch to discuss how working after retirement may impact your tax liability and explore the best strategies for your retirement plans.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
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