Income Tax and Annuities
For most people, retirement is usually a time where you would think about finishing up at work – but unfortunately, even when you finish working you are still responsible for paying income tax on any income that you continue to receive, regardless of whether it is a salary income or not.
In general, throughout the UK income tax is applicable to any form of income that you receive, not just your salary. This can cover any interest that you receive from bank accounts, investments and property. Your annuity also falls under this category and even after you have retired if you are still receiving an income from an annuity then you must declare this as a source of income.
How does income tax and annuities work?
Income tax on annuities works in basically the same way that income tax works on any generic source of income and is based on the amount of annual income that you receive. The thresholds are exactly the same as what you would pay for generic income tax and you are expected to pay accordingly. The main difference with annuity income is that generally when you receive your annuity income you will be of an older age and therefore could be eligible for a higher initial tax free threshold.
In the UK the basic tax threshold is currently around £8000 for anyone under the age of 65, but this increases for people over the age of 65 to £10,500 and then £10,660 for anyone over the age of 75. In essence this means that with a higher personal allowance, anyone over the age of 65 will be paying slightly less income tax than anyone under this age, and accordingly may pay a lower income tax on their annuity.
What other taxes might I be eligible to pay?
Income tax in general is the only tax that you will have to pay directly on your annuity, but there are other taxes which can be associated with the purchase of an annuity. If you take out an annuity guarantee period where your annuity is guaranteed over a certain period of time and you were to die unexpectedly during this time then any beneficiaries could be subjected to paying inheritance tax on any financial benefit that they receive from your remaining annuity.