Save your age related tax allowance by investing in an ISA
Keep your age related tax allowance by suplementing your income via tax free income from your ISA
Your personal allowance is the part of your income that is totally tax free. The age related tax allowance is the amount of money over 65s can earn every year without paying any income tax.
Currently, for people age 65-74, the personal allowance is £9,490, while those over 75 can get up to £9,640. If you want to minimise yourr tax bill it's vital for people over 65-75 to keep their income below this threshold.
In comparison, people age below 65, who earn less than £100,000, have just a basic allowance of £6,475.
Why are you not getting your full tax allowance?
Because, you are either earning the 'wrong type' of income, or, you are earning too much income in retirement
The wrong type of income?
The higher levels of the personal allowance for the over 65s depend not only on your age, but also on your total income per tax year.
At 65 or over, if your income is £22,900 or less, during this current tax year, you qualify for the full £9,490. However, once you earn over £22,900 your peronal allowance is reduced at a rate of £1 for every £2 you earn above the threshold of £22,900.
How does the that work?
For instance, say your total income is £27,715, which is £4,815 above the age related tax allowance of £22,900. As a result your personal allowance is reduced by £2,407 (£4,815 divided by 2 equals £2,407) to just £7,083.
The two-for-one 'clawback' rule means you lose all the extra age-related tax benefit, and, as a result your personal allowance is reduced to the basic rate of £6,475, if and when your income reaches £28,930 or above, when you are aged 65 to 74, or £29,230 when you are 75 or over.
This is terrible and can easily be rectified by having your savings in an ISA and draving income from your ISA when you are 65 or older.
Because income from an ISA is not regarded as 'relevant' income towards the age related tax allowance. In fact: ISA income is taxfree!
Tax free ISA income can be used to add to or even supplement pension income. It doesn't even have to be declared. As long as you don't hit the thersholds, you'll keep your full entitlement of the age related tax allowance.
For instance, you can withdraw £10,000's of ISA income without paying any income tax whatsoever and may remain a basic-rate income tax payer with regards to your other income.
As long as your ISA pot generates enough income, for instance by investing in companies which increase their dividends regularly you can enjoy substantial tax-free income in retirement.
What if you are earning above £100,000?
Since April 6th, 2010, and, irrespective of your age, once you earn more than £100,000 of the "wrong type" of income, you may end up with less personal allowance (i.e. less than £6,475), or, subject to your income, lose it completely.
Return from Age Related Tax Allowance to Tax Free ISA
Return from Age Related Tax Allowance to ISA Tax Benefits
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