Taxation: hints and wrinkles

Being over 65 can have its financial advantages. The system offers several tax breaks that are not available to younger taxpayers - but you have to know the rules.

Everyone gets a personal allowance of £4,385. This is the amount of taxable income you can receive before you start paying income tax. Married couples where one is 65 or over also qualify for the married couple's allowance, taking £200 off your tax bill.

Both of these can be increased by what are known as age allowances - although they depend on both age and income level. They operate in two age bands. For those aged 65-74, the personal allowance increases to £5,790, while at 75 and over it goes up to £6,050.

But these allowances are also governed by your income. This year, the income limit is £17,000. If your total taxable income is above that, the age allowances are reduced by £1 for every £2 of income over the limit. The following examples illustrate how the system works.

Harry is single, 66, with an income of £18,000 - £1,000 over the limit. He loses £500 of the age allowance, taking it to £5,290. On the other hand George, who is married, aged 66, has an income of £20,000 - putting him £3,000 over the limit. This wipes out all his extra £1,405 age allowance, so he can claim only the basic personal allowance of £4,385.

He still receives an increased married couple's allowance. Of his £3,000 'excess' income, £2,810 has been set against his personal allowance. That leaves only £190 to count against his married couple's allowance.

If you have income from investments, you may be able to change them to cut your tax bill by qualifying for the higher allowances. Individual savings accounts and national savings certificates both offer tax-free income. But you have to hold savings certificates for at least 12 months to start a regular encashment plan that will pay out tax free.

Although you can't put any more money into Peps and Tessas, you can draw the income - without it counting as taxable income.

There are several other types of investment which can provide income in a non-taxable form. If you have bought an annuity, the taxman treats part of each payment you get as capital, rather than income. It is not subject to income tax - and can be ignored when it comes to calculating your age allowances.

Single-premium life assurance bonds - often known as investment bonds - also offer tax-saving potential.There is no tax liability until the entire bond is cashed or matures, and you can withdraw a sum equal to 5 per cent of the original investment every year for up to 20 years. Again, this is a return of capital - not income - so you pay no tax and it does not count against allowances.

Another technique is for married couples to share their investments. Arthur, 72, has pensions of £16,500, and his savings in the building society pay £4,000 in interest net of tax.

His wife, Jane, 70, has a £3,000 pension. By transferring the building society account into Jane's name she will qualify for a tax repayment of £710.

In addition, Arthur's tax bill will be cut by £309.10 because he will qualify for an age allowance and a higher married couple's allowance. The simple step of transferring the building society interest from husband to wife saves them more than £19.50 per week.

Another option is to put investments into joint names. Where assets are held in joint names, husband and wife are each treated as entitled to an equal share of any income.

• The author is senior tax manager at accountant PricewaterhouseCoopers.