Savings, investments and tax in retirement
When you retire, the money you get from your pensions may be your main income. But if you also get money from savings or investments, that might affect how much Income Tax you pay.
All your income is added together
We don’t look at each bit of income on its own. We add everything together – your State Pension, workplace or private pensions, interest you get from savings, investments and more.
Most people are allowed a certain amount of income each year that they don’t pay tax on. This is called your tax-free Personal Allowance. The current standard tax-free Personal Allowance is £12,570 a year.
If your total income is more than £12,570, then you start paying tax on any money above that amount.
You get tax-free interest on savings
As well as a Personal Allowance, most people also get a Personal Savings Allowance. This is the amount of money you can get as interest from savings, tax-free.
Your Personal Savings Allowance depends on your income:
- if your income is between £12,571 and £50,270, you’ll pay Income Tax at the basic rate of 20%. This means your Personal Savings Allowance is £1,000 a year
- if your income is between £50,271 and £125,140, you’ll pay Income Tax at the higher rate of 40%. This means your Personal Savings Allowance is £500 a year
- if your income is more than £125,140, you don’t get a Personal Savings Allowance
If you live in Scotland things are a bit different. You can find the Scottish rates of Income Tax on GOV.UK.
Key thing to remember:
Some of the money you get as interest from an Individual Savings Account (ISA) is always tax-free. You can find out more on GOV.UK.
What about income from investments?
You might own shares or investments that pay out something called a dividend. This is when a company makes a profit and then pays out a share of it to you.
Most people get a dividend allowance, which means you can earn £500 a year in dividends, tax-free. Any dividends above £500 will count towards your total yearly income, so they could push your income above your tax-free Personal Allowance.
You can find out more about tax and allowances on dividends on GOV.UK.
Selling an investment and Capital Gains Tax
Capital Gains Tax is different to Income Tax. You’ll normally pay it if you sell something you own for more than you paid for it. This is called making a ‘gain’.
You could be selling:
- a second home
- shares in a company
- valuable jewellery
You don’t pay Capital Gains Tax on everything, and – just like your income and savings – you can make a certain amount of profit or ‘gains’, tax-free.
You can read more about selling assets, how Capital Gains Tax works and the allowances on this page.
When to do a tax return
If your income from savings and investments is over £10,000, you’ll need to fill out a Self Assessment tax return.
Don’t worry, it’s simpler than you might think. You can find out all you need to know on our Self Assessment page.
You’ll need to include any profit you’ve made and the Capital Gains Tax you owe on your tax return too.
If your income is less than £10,000
If your income from savings and investments is less than £10,000, you don’t need to send us a tax return.
If you’re employed and get a salary – or you receive a workplace or private pension, we’ll try to automatically collect any tax you owe through your wages or pension before you’re paid. We’ll do this by changing your tax code. It all happens behind the scenes so you don’t need to do anything.
If we can’t collect what you owe this way, we may send you a Simple Assessment letter.
Simple Assessment is a letter from us that lets you know what tax you owe and how to pay. It’s a totally normal process and often happens if your savings income is quite high, or if you have income from investments that haven’t been taxed yet.
Here’s an example:
Alan’s tax-free Personal Allowance is £12,570 a year.
This year, he gets £18,000 from his State Pension and private pension combined.
That’s £5,430 above his Personal Allowance, so that extra bit is taxable.
Alan pays Income Tax at the basic rate of 20%, so his Personal Savings Allowance is £1,000.
He gets £800 in interest on his savings. That falls within his £1,000 Personal Savings Allowance – so he doesn’t need to pay any extra tax on this.
However, if Alan had earned £1,500 interest, he would’ve needed to pay tax on the £500 that’s above his £1,000 Personal Savings Allowance.
Starting rate for savings
If Alan had earned less than £17,570 from his pensions, he would also have been eligible to use something called the starting rate for savings. This means you may get up to £5,000 of interest and not pay tax on it. Find out more about how the starting rate for savings works on GOV.UK.
4 key things to remember
When you retire, how your savings and investment income is taxed doesn’t change. It all adds to your total income
You have tax-free allowances that can help reduce what you owe
If you get more than £10,000 in income from savings and investment, you’ll need to do a Self Assessment tax return
If you get less than £10,000, we’ll try to collect what you owe by changing your tax code or sending you a Simple Assessment letter
We know there’s a lot to take in, but don’t worry. Once you understand the basics, it all becomes a lot easier to manage.