How Can A Retired Couple Have £65,740+ Tax Free Income?
We have been meaning to shoot this video for some months now but the March Budget 2021 has escalated the need for us all to be as tax efficient as we can given that all our tax free allowances are to be frozen until 2026 meaning we can expect no personal allowance or other allowance increases until 2027.
This is how you can deliver a tax free income in retirement.
Personal Allowance £12,570 pa
This is the amount of taxable income (earned or pension) that you can receive and pay no income tax. If you have a pension scheme and you place it in flexible drawdown, you can draw down £12,570 pa and pay no income taxes or if you have state pensions you can incorporate that too, with combined state pension income and flexible drawdown income up to the £12,570 point. If you are not at state pension age yet, this may mean you could even phase drawdown both the taxable pension element as well as the 25% tax free lump sum element. E.g. for the next 5 years, you flexibly drawdown £12,570 pension with no tax plus tax free cash £4,190 meaning a huge £16,760 pa tax free.
Dividend Allowance £2,000 pa
We all have a tax free dividend allowance of £2,000 pa for dividend income received from shares, unit trusts, investment trusts and other share based investments.
Savings Allowance £1,000 pa
If you are a basic rate tax payer, you can earn up to £1,000pa in interest tax free (higher rate tax payers = £500pa).
Capital Gains Tax Allowance £12,300 pa
If you sell shares or other assets that are subject to capital gains tax, you can realise profits/gains up to £12,300 each year with no tax to pay.
Offshore Bonds using Starting Rate Savings Allowance £5,000 pa.
If you are a low earner you are also entitled to £5,000 pa in tax free investment income as part of your Starting Rate Savings Allowance. Offshore investment bonds grow tax free offshore. You can withdraw up to 5% pa of the original capital from investment bonds without incurring any immediate tax liability. Invest £100,000 in offshore bonds, they grow tax free and then you can withdraw up to 5% pa, in the case £5,000 pa, without incurring any ‘top slice’ calculations for income tax. Tax may be payable if you withdraw larger amounts than this and/or when you have withdraw 5% of the original investment each year for 20 years meaning that in 20 years time you will have withdrawn 5% X 20 years = 100% of the original investment and all that is left in there is the growth, which after 20 years you either draw down when required and pay taxes due on the gain or leave it to grow as an inheritance for loved ones. The £5,000 yearly withdrawal can used within the £5,000 Starting Rate Savings Allowance of £5,000 pa, meaning no tax. You may consider onshore bonds rather than offshore but the onshore insurance investment fund will pay tax on gains each year, meaning you have indirectly paid taxes, so whilst still good, it is not as tax efficient.
Tax Free ISA Income £+
Finally, if you have invested each tax year using your ISA allowance, any dividend or savings income you receive is tax free plus any capital or growth that you ‘cash in’ is also tax free.
Total Income Individual £32,870 pa +
Personal Allowance £12,570 pa + Dividend Allowance £2,000 pa + Savings Allowance £1,000 pa + Capital Gains Tax Allowance £12,300 pa + Offshore Bonds using Starting Rate Savings Allowance £5,000 pa = £32,870 pa. This could be even higher when adding tax free cash withdrawals from your pensions and ISA withdrawals.
Total Income per Couple £65,740 pa +
Double up with using all the above allowances to achieve a huge tax free income. Again, this could be even higher when adding tax free cash withdrawals from your pensions and ISA withdrawals for both of you.