Retirement taxation

Understanding the bottom line

Retired households handed over an average of £7,400 each in tax last year – the equivalent of nearly 30% of their annual income, according to analysis of newly released data[1] by Prudential.

The total annual tax bill for the UK’s 7.1 million retired households was £52.7 billion from direct and indirect taxes, according to the most recent available figures from the ONS.

Retired household taxes

The average retired household saw its tax bill rise by around £400 in the 12 months to April 2016, increasing the total tax received by the exchequer from pensioners by around £1.7 billion. But the good news is that average retired household incomes, including the State Pension, private pensions, benefits and other earnings, increased by around £1,200 to just over £25,000.

Direct taxation increase

Retired household tax bills mount up from direct taxes such as Income Tax and council tax which cost an average of just over £3,050 during the same period, and indirect taxes such as VAT, insurance premium tax and vehicle excise duty which cost an average of £4,360. The majority of the increase came from direct taxation.

Average working household

Pensioners paid a slightly lower proportion of their income in taxes than those who were still working – the total tax take for retired
households was around 4 percentage points lower than the 34% paid by the average working household.

Giving up work

It’s important not to forget that stopping working doesn’t mean you’ll no longer be paying taxes, and many retired people will still need to consider Income Tax bills as well as all the other indirect taxation on expenditure that they will continue to face when they give up work.

Source data:
[1] The Effects of Taxes and Benefits on Household Income: Financial Year Ending 2016

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