Stan Russell

Retirement Income Expert at Prudential

Pensioner incomes take a 30 per cent tax hit

21 June 2017

  • Average retired household pays £7,400 a year in tax
  • Pensioners contributed a total of £52.7 billion in tax in the year to April 2016
  • However, pensioners pay less tax as a proportion of their total income than working households

Retired households handed over an average of £7,400 each in tax last year – the equivalent of nearly 30 per cent of their annual income, according to analysis of newly released data1 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 for the 2015-16 tax year.

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.

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 in 2015-16, and indirect taxes such as VAT, insurance premium tax and vehicle excise duty which cost an average of £4,360 during the same period. The majority of the increase came from direct taxation which increased by £300 on average from its 2014-15 level.

The average retired household paid around £1,970 in income tax in 2015/16 compared with just over £1,700 in the previous tax year.

The proportion of retired households’ income taken in tax was marginally lower in 2015-16 than it was in the previous 12 months – 29.6 per cent compared with 29.7 per cent in 2014-15 and 30.1 per cent in 2013-143.

Prudential’s analysis also showed that in 2015-16 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 per cent paid by the average working household.

Stan Russell, a retirement income expert at Prudential, said: “No longer 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.

“We have seen income expectations for new pensioners rise in recent years which, for many will mean that they continue to face tax bills well into retirement. People planning to give up work should make sure they don’t underestimate the impact that tax will have on their income in retirement.

“Saving as much as possible as early as possible during their working lives should help people to plan ahead with more confidence. Creating a long-term plan to set a target income level, and better understand tax implications, can be achieved through a consultation with a professional financial adviser, or with the help of some of the free independent guidance available through organisations such as the Government’s Pension Wise service or The Pensions Advisory Service.”

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