How is my State Pension taxed?

Any State Pension you get is liable to income tax, but it’s paid to you before any tax is deducted.

State Pension and Income Tax

State Pension income is taxable but usually paid without any tax being deducted.

You no longer have to pay National Insurance contributions when you’ve reached State Pension age.

The amount of income tax you pay depends on your total annual income from all sources. For example:

  • earnings (including State Pension)
  • profits from self-employment
  • rental income
  • other pensions you’re getting
  • bank or building society interest
  • income from your investments.

You only pay Income Tax once your total annual income is above your Personal Allowance. The standard Personal Allowance for the tax year 2021-22 is £12,570.

Your Personal Allowance might be more or less than the standard figure due to a number of other factors.

HMRC should tell you how much your Personal Allowance is each time it changes.

If your total annual 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.

Although tax isn’t deducted from the State Pension, it will therefore use up some of your tax-free personal allowance. In 2021/22 the standard tax-free personal allowance is £12,570, which means that if you receive the full new State Pension, you will have £3,230.80 (£12,570 less £9,339.20) of your personal allowance remaining for other taxable income streams such as employment or a private or occupational pension.

State Pension and other income

If you’re employed or you have income from another pension as well as the State Pension, HMRC will ask your employer and/or pension provider to apply a lower tax code.

This is to compensate for the fact that tax hasn’t 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 to HMRC on your behalf.             

If you’re self-employed and getting your State Pension, or you have other income – such as income from renting a property – you’re likely to need to fill in a Self Assessment tax return at the end of the year. 

Things you should check

It’s important to check each year that you’ve paid the right amount of tax on the income you get.

This is especially important if you have a few different sources of income, such as:

  • a part-time or full-time job
  • bank or building society interest
  • income or dividends from investments.

You also need to check if you have a change of circumstances that affects the income you get, for example, you retire from work and get a lower income.

If you’ve 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 might also have to pay any tax that’s been underpaid.

If you don’t have other sources of income, such as other pensions or income from a job, and you started getting your State Pension before April 2016, you’ll have to complete a Self Assessment tax return each year.

This is so HMRC can calculate and confirm the amount of tax that’s 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’ve paid more tax than you should have, HMRC will refund the difference.

If you started getting your state pension on or after April 2016, HMRC will write to you to let you know how much you owe. You don’t need to complete a tax return.

Delaying or stopping taking your State Pension and tax

If you’ve delayed claiming your State Pension, or stopped getting it for a while, you won’t pay tax on the State Pension during the time you’re not getting it.  

The tax you pay when you start getting the State Pension you’ve put off receiving will depend on how the money is paid to you.

If you reached State Pension age after 6 April 2016, you’ll receive the State Pension you didn’t get paid in the form of an increased income. This will be taxable as earned income in the normal way.

If you reached State Pension age before 6 April 2016, you have a choice.

If you choose to have the State Pension you didn’t get paid as an increased income, this will be taxable as earned income in the normal way.

If you choose to have State Pension you didn’t get paid as a lump sum, this will be taxed at your current rate of Income Tax on your lump sum payment. For example, if you’re a basic rate taxpayer your lump sum will be taxed at 20%.

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Whatever your circumstances or plans, move forward with MoneyHelper.

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