Your pension counts as taxable income, which means that if you receive more than a certain amount per year you will be due to pay income tax.
On this page you will find information about:
Do I have to pay tax on my pension?
Your pension is part of your total taxable income calculation. You pay tax on any income that is more thanyour Personal Allowance amount. If you are required to pay tax on your pension, it will usually be taken at the source through the PAYE scheme. Your pension provider will pay a percentage of the amount directly to HMRC. If tax is also due on your state pension, this will be removed from your other pension or annuity payments. In this case you will still receive the full state pension, but you will pay more tax on your other pension(s).
If you think that your pension payments will take you over your personal allowance, you should register to complete a Self-Assessment tax return. It is important that you do this, because if you do not pay enough tax you may face a tax bill, possibly including penalties.
If you think you have paid too much tax on your pension you can apply for a Tax refund.
Are lump sum pension payments tax free?
In April 2015-16 tax year, the government introduced the option of cashing in lump sums from your overall pension pot. Defined contribution pensions now allow you to withdraw lump sums from the age of 55. Taking out 25% of your pension pot this way is tax free. But taking more than that will be subject to income tax. Once you have taken out this quarter of your pension total, you will not be entitled to any other tax free withdrawals.
You can also choose to take out irregular smaller sums and get 25% of each amount tax free, as long as the rest of the pension remains invested.
The tax free lump sum is not counted within your Personal Allowance. Small pension pots, up to £10,000, can usually be cashed in during one transaction.
Different types of pension and their providers have different rules about taking out lump sums. There tax implications are also influenced by your personal situation, such as any other income streams. It is wise to consult a tax or financial expert before making any irreversible decisions about your financial future.
Do I have to pay tax on my state pension?
When you reach state pension age, you no longer need to pay National Insurance, however, you still need to pay Income Tax.
Every year, you receive a tax-free personal allowance, which may vary according to your age. If your total income, including your state pension, exceeds this personal allowance, then you need to pay Income Tax on the excess. The tax on this is usually paid through any private pension or other income paid through the PAYE system. Otherwise you need to pay this tax on your pension by using the self assessment system.
For further Tax information, please follow the links below: