1. Is the State Pension taxable and how is it taxed?
Yes, like any other income you receive, the State Pension is taxable. This is because it’s considered part of your total annual income, including both the basic and new State Pension.
The tax you pay on your State Pension depends on your total income for the tax year, which includes income from other sources like a job, self-employment, or a private pension. If your total income exceeds your personal allowance, you’ll pay tax on the excess. Remember that the rate of tax you pay depends on your income tax band.
If you’re a basic rate taxpayer, you’ll pay 20% tax on your State Pension income that exceeds the personal allowance. Alternatively, if you’re a higher rate taxpayer, you’ll pay 40% tax on the excess. The tax is usually deducted before you receive your State Pension payment through the PAYE system.
2. Can you receive lump sums from your State Pension and are they taxed?
No, you cannot receive a lump sum payment from your State Pension, it can only be paid in regular weekly amounts. However, if you defer claiming your State Pension, you can take the deferred amount as a lump sum payment when you start claiming it. This lump sum is then taxable.
The tax on the lump sum is calculated differently from other income. If the lump sum pushes you into a higher tax band, you won’t pay more tax. Instead, the lump sum is added to your income after it’s been taxed. This means that you could end up paying a higher rate of tax on some or all of the lump sum.
3. What happens if you owe tax on your State Pension?
If you owe tax on your State Pension, it will typically be automatically deducted before you receive your pension payment. This is done through the PAYE system, and HM Revenue and Customs (HMRC) will send you a P800 tax calculation at the end of the tax year.
This will show how much tax you owe or if you’re due a refund. If you owe tax, HMRC will usually adjust your tax code to collect due tax, and if you’re due a refund, they will send it to you. If you’re unsure about your tax situation, it’s important to seek advice from a tax expert or financial adviser.
4. How does self-employment affect tax on State Pension?
If you’re self-employed and receive a State Pension, both income sources count towards your total income for the tax year. If that exceeds your personal allowance, you must pay income tax. The rate of tax you pay depends on your income tax band.
Being self-employed, you must fill in a self assessment tax return for all tax years. This includes details of your earnings from self-employment and your State Pension. It is important that you pay tax on your profits from self-employment, as well as your State Pension.
5. When will I receive the first State Pension payment in the current tax year?
The exact date you’ll receive your first State Pension payment in the current tax year depends on your National Insurance number. This is because the last two digits of your number determine the day of the week you’ll be paid. For example, if your National Insurance Number ends in any number between 60 and 79, you will receive payment on Thursdays.
Payments are usually made every 4 weeks and into an account of your choosing.
The current tax year in the UK started on 6 April 2023 and will end on 5 April 2024. If you reached State Pension age before the start of the current tax year, your first payment would be due on the first payment day after 6 April 2023. Alternatively, if you reach State Pension age during the current tax year, your first payment will be due within 5 weeks of reaching State Pension age.