A pension, once in payment to you, is a taxable benefit.
You may therefore be liable to pay Income Tax on any pensions that
you receive in excess of your personal tax allowance.
Income Tax
Income Tax is payable if your taxable income (including earned
income, private pensions and the state pension) is more than your
personal tax allowance. It is deducted from any earned income
above that allowance.
For example, if your personal allowance is £9,940 and
your earned income is £12,000, you pay Income Tax on just
£2,060 (£12,000 - £9,940).
Personal Tax Allowances (For 2011/12)
| Age |
Personal Tax Allowance* |
| Under 65 |
£7,475 |
| 65 or over* |
£9,940** |
| 75 or over* |
£10,090** |
These are standard rates. HM Revenue & Customs will
advise you of your rate in advance of each new tax year.
* The allowance reduces where the income is above £100,000
by £1 for every £2 of income above
£100,000. This reduction applies, irrespective of
age.
** These allowances reduce where the income is above the
income limit - £24,000 - by £1 for every £2 of
income above the limit until they reach the level of the personal
allowance for those aged under 65.
For example, if you're 66 and have an income of
£24,500, £500 over the limit of £24,000, HMRC
would reduce your age-related allowance by £250 from
£9,940 to £9,690.
Income Tax Rates (For 2011/12)
The following rates apply to earned income over your personal
tax allowance.
| Earned Income Above Tax Allowance |
Tax Rate |
| £0 to £35,000 |
20% |
| £35,001 to £150,000 |
40% |
| Over £150,000 |
50% |
So, if your personal allowance is £9,940 and your
earned income is £12,000, you pay Income Tax of £412
([12,000 - £9,940] x 20%).
Paying Income Tax on Your State Pension
Income Tax is deducted from the pension before it is paid to
you, under the Pay As You Earn (PAYE) system. This is
sometimes known as deducting tax 'at source'.
If you receive any the state pension, you may find that extra
Income Tax is deducted from your private pension. This is
because the government will ask your private pension provider to
deduct any Income Tax due from your state pension. Your state
pension will effectively be paid tax-free, with excess Income Tax
deducted from other pensions. Contact your local Tax Office
if you are not sure.
What If I Think I Have Paid Too Much Tax?
According to HM Revenue and Customs there are several reasons
why an individual may end up paying too much tax. They publish a
short overview on this subject, including how to claim a refund,
here on their webpage:
http://www.hmrc.gov.uk/incometax/overpaid-thro-pension.htm
National Insurance Contributions
You do not have to pay National Insurance Contributions (NICs)
on your pensions in payment.
If you decide to continue working beyond your State Pension Age
(SPA), you will not have to pay NICs on your earned income
either. You can get an Age Exemption Certificate from HM
Revenue & Customs by calling 0845 302 1479. If you give
this to your employer, they will stop deducting NICs from your
pay.
