State pensioners may be subject to tax on the sum
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For millions of people, the state pension is the bedrock of retirement finances. As a result, individuals will want to receive the highest amount possible, especially amid the cost of living crisis.
However, retirees should be aware of the tax implications which apply to the state pension.
Income from the state pension is taxable under the Government’s rules, but whether it is deducted depends on circumstances.
The payment is usually paid without tax being deducted, but that does not mean some will not have to bear tax implications in mind.
The amount of income tax a person pays is dependent on their total annual income from all sources.
- The state pension – either the basic state pension or new state pension
- Additional state pension
- Private, workplace or personal pension – although some of this can be taken tax-free
- Earnings from employment or self employment
- Any taxable benefits
- Any other income, such as from investments, property or savings.
Individuals will only pay income tax if their total annual income exceeds their Personal Allowance.
The standard Personal Allowance for the current tax year 2022-23 is £12,570.
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Of course, what people get from the state pension will vary, typically according to their National Insurance contributions.
Tax is not deducted directly from the state pension, but it will use up some of a person’s tax-free Personal Allowance.
For example, if an individual receives the full new state pension, they will get £9,627.80 per year.
Taking this away from their personal allowance it means they would have £2,942.20 remaining.
It means this is the remaining sum for other taxable income streams, as aforementioned.
When it comes to income tax and private pensions, there are also rules to bear in mind.
The Government website explains: “You may have to pay Income Tax at a higher rate if you take a large amount from a private pension.
“You may also owe extra tax at the end of the tax year.”
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Tax charges are also applicable for those who save above a particular threshold.
People will pay a tax charge if the total value of their private pensions exceeds £1,073,100.
This is known as the Lifetime Allowance, which has garnered some level of controversy.
A person’s pension provider will take off the charge before they receive their payment, if it is applicable.
People will not typically pay any tax if their total annual income adds up to less than their Personal Allowance.
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