Tax takes a 29% chunk of pensioner income

Tax takes a 29% chunk of pensioner income

Dominic Grinstead

The average UK pensioner household pays out 29% of its income in retirement to the tax authorities through a combination of direct and indirect taxation, which add up to an annual tax bill of nearly £42 billion, according to new analysis from MetLife.

On an average gross pensioner household income of £20,130, that equates to £5,864 paid out in tax, with income tax accounting for nearly £1,501 of the bill and indirect taxes including VAT totalling £1,937. Council tax is the third-largest tax burden accounting for 5.8% of gross income.

With an average tax liability of £5,864 for the UK’s 7.15 million retired households, the bill from direct and indirect taxation equates to around £41.9 billion.

In total, direct taxes, including income tax and council tax, account for 12.2% out of the 29% tax burden with indirect taxes, including VAT, duty on tobacco, alcohol and petrol, vehicle excise duty and TV licences, accounting for 16.8%.

However, MetLife found that less well-off households proportionally pay out the most in direct and indirect tax with 42% of their gross household income being paid out in tax. The bottom tenth of pensioner households, in receipt of gross income estimated at £8,259 a year, pay £3,599 in taxes.

The top 10% of pensioner households, with gross income of £47,992, see 29% of their income going in direct and indirect tax.

“Pensioners need to think about the effects of direct and indirect tax on their retirement income and to plan accordingly,” said Dominic Grinstead (pictured), managing director, MetLife UK.

“With 29% of gross retirement income being swallowed up by tax it is clearly a major factor to consider when planning for retirement.

“When you add in the potential effects of inflation in a retirement lasting up to 20 or even 30 years it is clear that savers need to consider all retirement income solutions in order to achieve a degree of certainty.”

MetLife’s analysis shows the average retired household receives 40% of its gross income from private and occupational pensions with 39% coming from the State Pension and the rest coming from investments and savings plus other benefits. The average private pension pays £8,134 per household before taxes.