Pension tax – Tax payable even in retirement
If the term pension tax comes as a surprise to you, don’t worry – many pension savers do not realise that they may have to pay pension tax when they draw their pension, or in retirement.
While you do stop paying National Insurance contributions when you reach state pension age, you do not automatically qualify to stop paying tax – there may be pension tax due on your income, both from a personal or company pension, and from your basic state pension. This depends on your overall level of income. Principle First can give quality pension advice to clarify your exact situation with regard to pension tax and pension tax rates.
Pension Tax – your Pension Tax Allowance
If your total income after state pension age is higher than your pension tax allowance, even if you are no longer working, you are likely to have pension tax to pay. Your total income could consist of the combined money you receive from the basic state pension and your company pension or personal pension. The good news is that pension tax applies only to income above your pension tax allowance – and this increases with age.
Let us tell you if you have pension tax to pay! Contact us with an online pension advice enquiry or ring freephone 0800 678 5929 now.
Until you reach state pension age your pension tax allowance is the same as your personal tax allowance when you were working – i.e. £6,475 per year. This amount of income you can receive free of retirement pension tax.
Your pension tax allowance rises when you turn 65. From that point, your pension tax allowance will be £9, 490. This means you can have pension income or working income up to that amount, without having pension tax to pay. However, if your earnings are higher than that, they will be subject to tax. Furthermore, if you earn over £22,900 in the year, your pension tax allowance begins to taper away. You lose £1 of your pension tax allowance for every £2 of income above £22,900, until the basic pension tax allowance of £6,475 is reached – in other words, you lose the extra pension tax allowance that you had for being 65.
If you are 75, your pension tax allowance rises to £9,640, with the same pension tax rules and tapering off structure applying if your earnings or income exceed £22,900.
The basic state pension is always paid out free of pension tax. However, if your total income does exceed your pension tax allowance, all pension tax payable comes out of your personal or company pension. It will be deducted automatically, in keeping with the pension tax rates, before you receive your payments.
It is important to note that this tax deducted from your personal or company pension may seem high, because it includes the pension tax due on your basic state pension as well.
To check if you will have retirement pension tax to pay, contact us with an online pension advice enquiry or ring freephone 0800 678 5929 now.
All figures correct as of August 2010
