The Retirement Newsletter: How to pay less tax in the UK?

Issue Number: -117 — A ‘trick’ everyone can use to pay less tax in the UK

Photo by Michael Longmire on Unsplash

Welcome

Welcome to issue -117 — I still have 117 weeks to go until I retire — after the last week at work, I may make it less!

This week, I will be replying to an email that asked how to work out the gross income required for a net pension if you're over 67 in the UK.

I will also look at how the recent National Insurance increase in the UK will impact pensions.

Plus, a bit on health.

Health

As we saw last week — Issue Number: -118 — What is it like to be newly retired? — a couple of my friends said they had noticed a few 'health niggles’ since they had retired. And I have a couple of 'niggles’, so I went to get them checked out (usually, I wouldn't bother).

I made an appointment, and I went to see the doc. The next thing I knew, I was having my chest X-rayed and an appointment for some blood work.

If you haven't been to the doc in a while, it might be a good time to get things checked out. And, while you are at the docs, get a flu shot and, if you haven't already, a COVID-19 jab.

I'll be saying more about flu next week.

Money

OK, first off, I want to say that I am not a financial advisor. I am writing about what I have read over the years about money and about preparing to retire. What follows is not financial advice.

How to calculate the required gross income required for a net pension in the UK if you are over 67

Back in newsletter -119 — How much do you need to retire? The maths! — I explained how I had calculated the gross income required in the UK to hit a net pension. It all came down to a final equation that looked like this:

G = (N - 3663.96) / 0.68

Where G is the gross income required to achieve a net income of N. The equation uses tax and National Insurance figures for the tax year 2021/22.

The above formula gave a breakdown as follows:

Retirement income under the age of 67

At the time, I said that the equation did not work if the gross income goes over £50,000 per year — as different taxation rules apply (see UK Government — Income Tax rates and Personal Allowances) and if you were over 67 as you no longer pay National Insurance.

So, what is it if you are over 67?

Well, after 67, you no longer pay National Insurance, so the formula changes to:

G = (N - 2515.8) / 0.8

And this gives:

Retirement income over the age of 67

So now you need less gross income to meet your net requirement. And, if your gross had stayed the same, you would see the following changes in your net income:

Retirement income over the age of 67 with no change in gross income

So, not massive changes.  But every little helps.

Changes in National Insurance

At the time of writing, National Insurance in the UK is 12% with an extra 2% on earnings over £967 a week (£4,189 a month). However, in April 2022, there this be an increase of 1.25% to take it to 13.25%.

So, what impact will this have on a retired person in the UK under 67? The changes can be seen in the table below:

Impact of the new National Insurance tax rate on required gross income

So, some quite sizeable increases in the gross amount you will need per year, particularly in the Moderate and Luxury bands (see the What will be your type of retirement? newsletter for a description of the bands).

However, what sort of drop could you expect in your income if you are currently meeting the required gross to meet your net?

Change in net income as a result of the change in the UK National Insurance tax rate

Some steep drops, with people losing between £100 and £300 per month. Not good.

How to pay less tax in the UK? The trick…

As I have shown above, the 'trick' to paying less tax in the UK is to turn 67 because at 67, your national pension should start, and you stop paying National Insurance — that is, you pay less tax. Not much of a trick, really!

Turning 67 is a 'win-win' as your income gets an increase from the removal of National Insurance, and you can start getting your State Pension. And I will be looking at this in more detail in a later newsletter.

Additional Help and Information

If you are UK-based, here are the key websites that you might find helpful in estimating the tax liability on your pension:

• UK Government — Income Tax rates and Personal Allowances

• UK Government — National Insurance

• UK Government — Check your National Insurance record

• UK Government — Estimate your Income Tax for the current year

• UK Government — Check your State Pension forecast

Please note I am not a financial advisor. I am writing about what I have read over the years about money and preparing to retire. This is not financial advice.

Useful links

UK Government Website - How to avoid pension scams

Reflections

I can't get over how quickly this year is slipping by…

Last weekend I was out for a walk, and it seemed like only yesterday that I was walking the same path, and the Bluebells were out.

Spring - Bluebells in the local woods

Where has the year gone? From spring to autumn in the blink of an eye.

Next week

Next week, I will be writing about why you should get a flu shot. And, if you are wondering why I feel I can write about such things, well, I have a PhD in biochemistry and so I know how to read scientific papers and how to interpret scientific findings. Plus, I have a passing interest in proteins and vaccines.

Thanks

Thanks for taking the time to read this newsletter, and please don't hesitate to share it with your friends or on social media using the buttons below.

If you would like to say 'thanks' for the newsletter, why not buy me a cup of tea?

Until next time,

Nick

PS, If you have something you would like to contribute to the newsletter — a story, advice, anything — please get in touch.

Please note: I am not a financial advisor. When I am writing about money and financial matters, it is based on things I have read about money and about preparing to retire. IT IS NOT FINANCIAL ADVICE.