A commonly misconstrued belief is that once you reach pensionable age and can draw a pension, state or private, that you no longer have to pay any tax… this is completely untrue. Some people also believe that only Private pensions are taxed and state pensions are tax-free… again, a fallacy.
- State Pensions are like any other source of income that you receive/ earn and are treated as earned income for income tax purposes (although you don’t need 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 (earned income from any jobs, other pensions, investments, rentals 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 2018-19 is £11,850).
- The State Pension is paid to you gross (before any tax is deducted) and it’s up to you to ensure that any tax due is paid to HMRC
If you have a job or receive other pension income, your employer and/or pension provider will deduct income tax from the amount they pay you and pay this across to HMRC on your behalf. They’ll also deduct tax due on your State Pension.
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. Any tax owed will be due by 31 January in the year following the tax year – so for the tax year ended 4th April 2018, your taxes will be due by 31 January 2019.
We recommend to our clients that for each £1 untaxed income that you receive that you put £0.20 aside in a separate bank account to cover your taxes if you are a basic rate tax payer. This is generally more than sufficient and will hopefully leave you with a bit of ‘rainy day’ slush fund come January.
If you have any queries or questions then please contact us on 01733 699033 or via email on [email protected]
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