During your working life the tax you have to pay is generally dealt with automatically by your employer. They receive instructions from HMRC (Her Majesty's Revenue and Customs) via a tax code and deduct a certain amount of tax, and National Insurance Contributions (NICs) from your pay before you receive it. The amount you receive is called ‘net pay’ and your dues to the State are satisfied without any action on your part. At the end of each tax year your employer gives you a certificate called a P60 showing how much tax and NICs they have deducted over the year.
If you are self-employed or receive any taxable income which has not had tax taken off already, such as rent, you probably have a little more contact with the tax authorities, letting them know about your income for the year by completing a Self Assessment tax return and then paying the tax due either directly or through the next year’s tax code.
Now, however, as you retire your financial and taxation circumstances may be about to change as extensively as your lifestyle. You, as a financial entity, will become a little more complicated. You may have several sources of income including multiple pensions, state pension/ benefits and employment probably all starting at different times in the year. Not forgetting that the taxable state pension is paid gross so your tax codes will need adjusting. You may even find yourself in Self Assessment for the first time in your life. Needless to say the tax system will find you more difficult to handle and you will not have the support of a payroll team; quite a change for the majority of you who have been employed. Even for some of the self-employed, managing tax in retirement may have an impact if you can no longer afford to pay an accountant to do your books and sort out your tax liability. Because you usually only retire once, you have no experience of this life event.
It is important to keep track of your financial and tax situation in the year of retirement as this is the time HMRC’s systems can struggle most. Never assume that HMRC is aware of any changes. You can inform HMRC
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