Pensioners may get a ‘nice tax saving’ with withdrawal trick

Mini-Budget: Kwarteng announces cut to basic rate income tax

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Income tax has been high on the agenda of the new Government, with fresh plans laid out for the future. While Mr Kwarteng did U-Turn on the planned scrapping of the 45 percent income tax rate, he did stick to other changes.

Namely, he has prioritised a one percent reduction in the basic rate of tax.

This sees anyone earning above £12,570 pay 19 percent instead of 20 percent on income up to £50,270.

Express.co.uk spoke to Andy Butcher, Branch Principal and Chartered Financial Planner at Raymond James, about what this means.

Mr Butcher explained: “The one percent reduction in the basic rate of tax will help pensioners as much as it will help those still in work, but only those receiving a pension income over that first income tax threshold of £12,570.

“The basic state pension is £9,627.80, so anyone solely reliant on it won’t be earning enough to feel any difference from these changes. 

“Someone retiring on an annual pension income of £20,000 will be around £75 a year better off, which amounts to a saving of less than £1.50 a week; not unwelcome, but nothing to write home about.”

However, this is not the only announcement the Chancellor made within his mini-Budget.

Mr Kwarteng also said there would be a one-year transitional period on the tax relief applied to money going into pension pots.

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Mr Butcher continued: “Ordinarily, any money contributed to a pension pot will be topped up by the Government to the tune of 20 percent. 

“If you pay in £8,000, the Government adds another £2,000, so your pension balance increases by £10,000 overall. 

“That tax relief percentage was also set to fall to 19 percent, but the extra year transitional period means it will stay at 20% until 2024. 

“This means next year basic rate taxpayers can make a contribution into a pension that received relief at source, and still claim 20 percent tax relief, not the 19 percent they would have paid, an additional benefit for making a pension contribution.”

But how can pension savers and retired individuals benefit from these changes? 

This, according to Mr Butcher, is where a useful sort of trick can be used to help Britons.

He explained: “Anyone retiring imminently could feasibly draw the funds back out of the pension and possibly pay no tax at all, providing a nice tax saving. 

“For example, an individual earning £30,000 adds £10,000 into a pension in their last year of employment. This costs them £8,000 after tax relief. 

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“The following tax year, if they have no income they can draw the whole £10,000 back out of the pension making use of their personal allowance. A tax saving of £2,000. 

“This could be done around the end of one tax year and the start of another, helping with cash flow.”

With any pension decision, it is important to think carefully as any action could impact a person for decades.

As such, Britons are typically urged to seek advice, either independent and regulated, or through the Government-backed service PensionWise. 

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