How is my State Pension taxed?
Any State Pension you receive is liable to income tax but it’s paid to you gross (without any tax deducted).
State Pensions and income tax
State Pensions that you receive are treated as earned income for income tax purposes, although you are no longer liable to pay any further National Insurance contributions once you have reached State Pension age.
The amount of income tax that you pay depends on your gross income (the total amount of income potentially liable to tax that you receive from all sources, for example; earnings, profits from self-employment, other pensions you are receiving, and bank or building society interest).
You don’t pay any income tax on your gross income up to your personal allowance (the standard personal allowance for the tax year 2021/22 is £12,570). Your personal allowance may be more or less than the standard figure due to a number of other factors. HM Revenue & Customs (HMRC) should tell you how much your personal allowance is each time it changes.
If your gross income is more than your personal allowance, you're liable to pay income tax on the amount that exceeds the personal allowance. Different rates of income tax apply depending on the type of income and how much it is.
The State Pension is included as ‘earned income’ and therefore potentially taxable. However, it is always paid to you ‘gross’ (that is, no tax is deducted before you receive it).
State Pension and other incomes
If you have other income, as well as the State Pension you receive, such as a job or income from other pensions, HMRC will ask your employer and/or pension provider to apply a lower tax code to compensate for the fact that tax has not been deducted from your State Pension. The result will be that you have paid the correct tax overall. Your employer and/or pension provider will pay this across to HMRC on your behalf.
Similarly, if you do not work but get pensions from more than one provider, for example you have a workplace pension and a personal pension, HMRC will ask one of your providers to apply a lower tax code to compensate for the tax payable on your State Pension.
Things you should check
You should check each year that the correct amount of income tax has been deducted from the State Pension payments and other income you receive, especially if you have other sources of income, such as a part-time or full-time job, bank or building society interest and/ or dividends or distributions from investments.
You should also check if you have a change of circumstances that affects the income you receive; for example you retire from work and receive a lower income. If you have had more tax deducted than you should have paid, you can reclaim the difference from HMRC using one of their repayment claim forms. Similarly, you may also have to pay any tax that has been underpaid.
If you don’t have other sources of income, such as other pensions or income from a job, you will have to complete a self-assessment tax return each year, so that HMRC can calculate and confirm the amount of tax that is due on your State Pension. You then need to pay this tax to HMRC, so it’s a good idea to make sure that you put enough to one side to meet the tax bill. Again, if you have paid more tax than you should have done, HMRC will refund the difference.
Deferred State Pension and tax
If you have elected to defer taking your State Pension and your total income, in the tax year that you receive it, exceeds your personal allowance, some tax will be payable. You may need to submit a self-assessment tax return to HMRC. It’s therefore important to review your decision to defer your State Pension and the potential impact on your tax rate.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.