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Friday, 22 August 2008

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Money, tax and benefits

How your pension income is taxed

Your State Pension and any company or personal pensions you get are taxable. State Pensions are paid without tax deducted, but company and personal pensions usually have tax taken off first. How you pay tax on your pension income depends on which type you get and your overall taxable income. If you're on a low income you may be able to claim tax back.

Tax on your State Pension

Your State Pension is taxable income, even if it's based on your husband's or (where eligible) civil partner's National Insurance contributions. But you receive it without any tax taken off.

The Department for Work and Pensions (DWP) automatically notifies your tax office when you start getting your State Pension. But there may be a delay, so it's still a good idea to tell them yourself - to avoid getting behind with any tax payments if you're due to pay tax.

Do you always pay tax?

If your income, including your State Pension and any other pensions you get, is less than your tax allowances then you won't pay tax on your State Pension.

If your income is more than your tax allowances you'll have to pay tax on your State Pension. Your tax office will work out how much.

Taxpayer or non-taxpayer in retirement?

How to pay tax on your State Pension

If you already get another pension

If you get another pension, you'll usually pay tax on your State Pension through your pension provider's Pay As You Earn (PAYE) scheme (your tax office sends your pension provider a new tax code to show them how much tax to take off). This might make the tax on your company or personal pension seem unusually high.

If you've got more than one pension, your tax office will try to collect all the tax due from just one provider. But they might have to collect a bit from each.

Understanding your tax code

If you don't get another pension

If you don't get another pension you'll pay tax on your State Pension in one of two ways:

if you're working, you'll pay tax through your employer's PAYE scheme
if you're not working, you'll pay tax through Self Assessment (if you're not already a Self Assessment taxpayer ask your tax office for a tax return)

Do you need to fill in a tax return?

Checking that your tax code is right

You'll receive a P2 'Notice of coding' from your tax office at least once a year telling you your tax code. It's important to check this to make sure it shows the right amount of State Pension.

Tax codes and your State Pension (opens new window)

Tax on income from company or personal pensions set up after July 1988

Income from these schemes is paid to you by your pension provider via the PAYE system with tax already taken off. Your tax office sends your pension provider your tax code number, telling them how much tax to deduct (including any due on your State Pension) and taking into account your personal allowances.

You'll get a P60 at the end of the tax year showing your pension and the tax taken off. Keep this in case you have to fill in a tax return or need to claim tax back.

Tax on income from retirement annuities

If your pension comes from a pension plan set up before July 1988 it's called a 'retirement annuity' and your pension provider will take basic rate tax (20 per cent) off your pension before you get it:

if you're a higher rate taxpayer, you'll have to pay extra tax through Self Assessment
if you don't pay tax, or your non-savings income (broadly - pensions, taxable social security benefits, wages, trading profits, income from property) after deduction of personal allowances does not exceed the starting rate for savings limit (£2,320 for 2008-2009), you can contact your tax office to claim tax back
if don't pay tax you may be able to get your annuity paid without tax being taken off - ask your pension provider for form R89 - if it's a joint annuity you'll need form R86, which you can download from the HM Revenue & Customs (HMRC) website

Changes from April 2007

From 6 April 2007, income from retirement annuities will be paid to you by the annuity provider via the PAYE system with tax already taken off. Your tax office sends your annuity provider your tax code number, telling them how much tax to deduct (including any due on your State Pension) and taking into account your personal allowances.

You'll get a P60 at the end of the tax year showing your annuity and the tax taken off. Keep this in case you have to fill in a tax return or need to claim tax back

How will your pensions be taxed if you retire abroad?

Your UK pensions will still be taxable in the UK unless there's a 'double taxation agreement' (covering pensions) with the country where you live. If there is an agreement, you'll usually pay tax in that country.

If you get a pension for public service - perhaps a civil service or forces pension - then it'll normally be taxable in the UK. You'll have to fill in a tax return to claim your personal tax-free allowances.

For more details call HMRC Residency on 0845 0700 040 (or 029 2032 5058 if you worked for the government) between 7.30 am and 5.00 pm (Monday to Friday, excluding Bank Holidays).

Going abroad - HMRC Residency (opens new window)

Keeping HMRC informed

Whenever you start getting a new pension, tell your tax office - this will help make sure you pay the right amount of tax.