Retiring early

Until you reach 65, you receive a lower tax free personal allowance (£7,475 in 2011/12) so there is less tax free pay to cover your income (see Income Tax section on Personal Allowance  section for details).

If you retire early, there are a few more things to watch these include:

• The impact of taxable state benefits
• Part-time work and taxable benefits
• Other sources of income
• Redundancy

The impact of taxable state benefits

If you retire early through ill-health you may receive some support from a state benefit. Some of these benefits are taxable. Key taxable benefits are:

• Bereavement allowance
• Widowed parent’s allowance
• Carer’s allowance (for example for those retiring early to look after a relative)
• Incapacity Benefit (not taxable if short term lower rate or in payment before April 1995). Note: Pre-1995 long-term Incapacity Benefit claims are being re-assessed and claimants may be moved onto a taxable benefit such as contibutions based Employment and Support Allowance
• Employment and Support Allowance (taxable if contributions based, not taxable if income based).
• Job Seeker’s Allowance (always taxable – whether income based or contributions based)

Taxable state benefits use up part of your tax free personal allowance, meaning that you start to pay tax sooner on any other sources of income than you might expect.

For a list of taxable and non-taxable benefits, see:

• HMRC’s list of taxable benefits – http://www.hmrc.gov.uk/manuals/eimanual/EIM76101.htm
• HMRC’s list of non-taxable benefits – http://www.hmrc.gov.uk/manuals/eimanual/EIM76100.htm

Part-time work and taxable benefits

With a number of taxable state benefits (like Carer’s Allowance, ESA, JSA, and Incapacity Benefits) you may be permitted some part-time work. This permitted work can lead to an income tax bill.

If you receive a taxable benefit and have other income, such as a part-time job or a pension, which is taxed under PAYE, you should check to see if your PAYE tax code has taken account of the taxable benefit. If you are unsure how to do this, you should look at the section on PAYE codes, or take advice.

Other sources of income

If you retire early, you may have other sources of income such as self-employment or rental income. If so you should look at those sections of the website too (see: self employment section and property owner section). If you have to complete a self assessment tax, this will include all your sources of income.

Redundancy

If you received a redundancy package when you retired, and this exceeded the tax free threshold of £30,000, you may have more tax to pay after the end of the tax year. For more details see the Employee section on Redundancy