Running a business past state pension age: what changes for tax?

Your rate in the first bracket drops

The rate in the first bracket of box 1 consists of income tax plus national insurance contributions, and the state pension contribution is the largest part. Once you reach state pension age you no longer pay that contribution. That makes the rate in the first bracket roughly half the 35.75 per cent paid by those below state pension age. The brackets above it do not change: 37.56 per cent and 49.50 per cent stay the same.

If you reach state pension age mid-year, an intermediate rate applies: you pay the state pension contribution for the part of the year before your birthday. The tax authorities calculate that themselves from your date of birth, so you need do nothing. It is wise to review your provisional assessment that year, because it often still uses the old rate.

Your self-employed deduction halves, the hours criterion does not

Anyone who has already reached state pension age at the start of the calendar year receives half of the self-employed deduction. With a deduction of € 1,200 that leaves € 600. The reasoning is that the deduction is meant to compensate entrepreneurs who still have to provide for their old age. The hours criterion, by contrast, is not lowered: you still have to spend 1,225 hours a year on your business to qualify.

In practice that is the key issue. If you wind down to two or three days a week, you no longer reach those 1,225 hours and the deduction disappears entirely. So keep your hours record as long as you are close, and otherwise calculate without the deduction. You do keep the 12.70 per cent SME profit exemption, because that depends on your profit rather than your hours.

State pension, tax credits and the healthcare contribution

Your state pension is not reduced by what you earn on the side; there is no income test as with a benefit. But the pension is taxable income in box 1, and the pension authority withholds tax on it. Your profit comes on top, and together they determine your rate. That is why entrepreneurs past state pension age are often surprised by their assessment: tax has been withheld on the pension as if it were your only income, and on the profit you have to pay up yourself.

The tax credits change too. The general tax credit and the employed person's credit are lower for those over state pension age, because they no longer include a state pension element. In return there is the elderly person's credit, which depends on your total income. The income-dependent healthcare contribution on your profit remains due: it does not stop at state pension age.

Practical points when you keep working

For tax purposes you are still an ordinary entrepreneur, so the whole set of rules continues to apply: invoices that meet the requirements, VAT returns, records you keep for seven years. Disability cover usually also ends around state pension age, so check what happens if you fall ill and whether you can carry the risk yourself.

If you wind down to a few hours a week, the question is whether the tax authorities still see you as an entrepreneur. A handful of jobs a year without real business risk can be treated as income from other activities, in which case the entrepreneur deductions fall away. If you keep working structurally with several clients, there is no discussion. If you want to stop altogether, read stopping or pausing and cessation profit, because then you have to settle up one last time.

• Keep tracking your hours as long as you are near 1,225; half the self-employed deduction is still money.
• Calculate using your pension and your profit combined, not the profit alone.
• Check your policies: disability, liability and legal cover often have an end age.
• Think about the timing of cessation, because in that final year you settle up over your assets.

Frequently asked questions