The state pension is a taxable benefit. You may therefore
be liable to pay Income Tax on any state pension 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 £9,490 and
your earned income is £12,000, you pay Income Tax on just
£2,510 (£12,000 - £9,490).
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
If you receive another pension
If you receive any other pensions (i.e. a company or personal
pension) and you pay Income Tax on them, any Income Tax due from
your state pension will be deducted from them instead of from your
state pension. Your state pension will effectively be paid
tax-free, with excess Income Tax deducted from other pensions.
If you do not have receive another pension
If you only get a State Pension (and no other taxable income) or
if it is not possible to recoup all the Income Tax due from other
taxable income sources, then the Self-Assessment method would be
required to recover the Income Tax due.
State Pension Deferral Lump Sum
If you defer your state pension for at least 12 month, you can
take a lump sum. The lump sum is subject to Income Tax
at the rate applicable at the time of payment. It will not
push you into a higher tax bracket.
So, if your taxable earnings are below your personal tax
allowance (i.e. you do not pay Income Tax) at the time of payment,
the lump sum will be tax free. Even if the value of the lump
sum pushes your earned income over your personal tax allowance.
Click here to read
more about state pension deferral.
P161 Pension Coding Form
Shortly before you reach your State Pension Age, you will
receive a P161 Pension Coding form from HM Revenue &
Customs. It is very important that you complete and
return the form. It helps HMRC work out what Income Tax you
should pay on your pensions.
Click here to read more about the P161 Pension
Coding Form
National Insurance Contributions
You do not have to pay National Insurance Contributions (NICs)
once you have reached your State Pension Age (SPA). NICs will
therefore not be deducted from your state pension.
If you decide to continue working beyond your 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.
