State pension: Do you have to pay tax on your pension? Taxes explained
State pension payments are treated as earned income for income tax purposes and they are paid gross. This means that initially there no tax is deducted before the retiree receives it but some tax may be due eventually based on the individual circumstances. This is somewhat offset by national insurance contributions which stop once state pension age is reached.
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The actual tax due is based on a number of other factors however. Tax will be due if total income adds up to more than the individuals personal allowance. Total income is made up of the following:
The state pension received, which can be either basic or the new state pension
- Additional state pension
- Private pensions
- Earnings from employment or self-employment
- Any taxable benefits
- Other income such as money from investments, property or savings
Private pensions can be affected individually by unique rules. Usually, up to 25 percent can be taken from a private pension cash free.
There is also usually a tax charge if the total value of all private pensions is more than £1,055,000. The pension provider themselves will take off the charge before the retiree receives the payment.
It’s also worth noting that for higher rate income tax payers may have to pay more income tax if they take a large amount from a private pension. On top of this, there could also be extra tax owed at the end of the tax year.
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Most people in retirement will receive a combination of state and private pension income. This will usually come through certain providers and these providers will, in most cases, handle tax charges.
If a person is indeed receiving both state and private pension payments at the same time the provider will take off any tax before the retiree receives anything.
The retiree themselves will unlikely need to do anything to organise this. If payments are received from more than one provider, which is highly likely, HMRC will contact one of the persons providers to take off state pension tax.
This will all be organised on behalf of the retiree but at the end of the tax year the person will receive a P60. This form details all the tax the individual has paid should they want to check on it.
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There may be some individuals who only receive state pension in retirement however.
For these people, a much more hands on approach to tax will be needed. Responsibility for tax owed will fall directly on the retiree and not on the state or any pension provider.
To ensure the individual pays tax correctly, a self assessment tax return will need to be completed. This is the case for anyone who started receiving state pension before 6 April 2016.
Anyone who started to receive state pension on or after 6 April 2016 does not need to complete a tax return. In these instances, HMRC will write to people directly to tell them what is owed and how it can be paid.
Some individuals may also continue to work while receiving state pension, which is a completely valid option. If this route is taken, the person’s employer will take any tax due off the person’s earnings as well as their state pension payments. This will be done under the pay as you earn system (PAYE).
The self employed can also receive state pension while continuing to work but they will need to manually complete a self assessment tax return instead of utilising a PAYE system.
Organising tax affairs can be a daunting and complicated endeavour. However, there is support available for anyone unsure of what to do. There are government run organisations such as the Money Advice Service and Pension wise who offer impartial advice.
There are also various charities available who offer similar services. The government also have procedures in place should any tax mistakes occur. Everyone is assigned tax codes based on their individual circumstances and the state can be contacted if any codes are incorrect.
There is also the possibility that individuals could pay more tax than needed if they get their calculations wrong. If this is the case, a tax rebate (refund) can be claimed.
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