DO YOU PAY TAX ON THE STATE PENSION?

Do You Pay Tax On The State Pension? | May 2024

Understanding the tax implications of a State Pension is crucial to understanding your retirement income.

The question, “Do you pay tax on State Pension?” is a common one, and the answer is yes. State pensions (which differ from private pensions) are part of your taxable income, such as earnings from employment or self-employment.

Understanding State Pension Taxation

Like other forms of income, State Pensions are subject to income tax. This means that every tax year, you’re required to pay income tax on the amount you receive as State Pension.

The UK tax year runs from 6 April to 5 April in the following year.

It’s important to note that your State Pension isn’t paid to you tax-free, and that the amount of tax due depends on your total annual income.

This not only includes your State Pension, but also income from other sources. This could include a private pension or earnings from a part-time job.

The State Pension you receive can also affect how much tax you owe. The full new State Pension is £203.85 per week for the tax year 2023 to 2024. However, the amount you receive could be more or less, depending on your National Insurance record.

You could also owe extra tax at the end of the tax year, depending on whether your total income exceeds your personal allowance.

The personal allowance for the tax year 2023 to 2024 is £12,570. Any income above this threshold is taxable. This threshold normally changes every tax year, but the current allowance was frozen at the 2022 to 2023 limit.

You can also watch this video on Youtube here.

Tax Liability on State Pension Income

The tax deducted from your State pension income is calculated in the same way as tax on other income. The rate of tax you pay is dependent on your income tax band.

Remember, you pay tax depending on whether your total annual income adds up to more than your Personal Allowance.

Therefore, if your total income is between £12,571 and £50,270, the basic rate tax of 20% applies. Alternatively, if your income exceeds £50,270, a higher rate of 40% applies.

Any other pensions which you receive, including an occupational or personal pension, are a part of your total taxable income for the year. Consequently, this has the potential to push you into a higher tax band. This is if the total exceeds the higher rate threshold.

Your tax code is important too. If you’re receiving a State Pension and have another source of income, your pension provider will use your tax code to determine how much tax to deduct from your other income.

It is important that information is kept up-to-date, as If your tax code is incorrect, you could end up paying too much.

How State Pension Impacts Your Taxation

State Pension can impact your taxation in several ways.

The State Pension is included in your total taxable income for the year, therefore determining your overall tax liability. If your State Pension is your sole income and it’s less than your personal allowance, no tax will be deducted.

However, if you have other income besides your State Pension, this could push your total income over the personal allowance threshold, resulting in a tax liability.

This may include income from a private or workplace pension, earnings from a job or self-employment, and income from pension savings and investments.

Your State Pension is paid weekly, but it counts towards your annual income for tax purposes.

This means that even if your weekly State Pension amount is less than the weekly equivalent of the personal allowance, you could still owe tax depending on whether your total annual income exceeds it.

Your State Pension is also taxed at source, meaning that the tax is deducted before you receive your payment. This is different from other types of income, such as earnings from self-employment, which you need to report on a self assessment tax return.

Factors Determining Tax on State Pensions

Several factors determine how much tax you pay on your State Pension, including your total income, tax band, tax code, and personal allowance.

If your State Pension is your sole income and it’s less than your personal allowance, you won’t pay any tax. However, if you have other sources of income, these are added to your State Pension to work out your total income for the tax year.

Your tax band is also important. If your total income is within the basic rate tax band, you pay 20% tax on your income over the personal allowance, Conversely, if your income is above the higher rate threshold, the excess is taxed at 40%.

Your tax code tells your pension provider how much tax-free income you’re entitled to in the tax year.

Consequently, if you’re receiving a State Pension and have another source of income, your pension provider will use your tax code to determine how much tax to deduct from your other income.

Finally, your personal allowance (the amount of income you can earn each year before you start to pay tax) also affects how much tax you pay on your State Pension.

From 2023 to 2024, the personal allowance is £12,570. This means that any income exceeding this amount, including State Pension, is liable to tax.

"Like other forms of income, State Pensions are subject to income tax. This means that every tax year, you're required to pay income tax on the amount you receive as State Pension."

UK Care Guide Tweet

Tax Free Allowance and State Pension

As mentioned previously, the tax-free personal allowance for the tax year 2023 to 2024 is £12,570.

Your State Pension is included in calculating your personal allowance usage. Therefore, those receiving the full new State Pension of £203.85 per week will use the majority of their personal allowance.

Consequently, this leaves only a small tax-free allowance for additional income.

If you’re a higher rate taxpayer, your personal allowance is gradually reduced once your income exceeds £100,000. This means that if you have a large private pension or other income besides your State Pension, you may not be entitled to any personal allowance.

Tax Codes and Your State Pension

Your employer or pension provider uses your tax code to work out how much income tax to deduct from your earnings or pension. If you’re receiving a State Pension and have other income, your tax code will take this into account.

The most common tax code for the tax year 2023 to 2024 is 1257L, meaning that you can earn £12,570 before you start to pay tax.

If your tax code is 1257L and you receive the full new State Pension, the majority of your personal allowance will be used up by your State Pension.

For those with other sources of income such as a private pension, pension providers utilise your tax code to calculate the appropriate tax deductions.

If your tax code is incorrect, you could end up paying too much tax, or you could end up owing extra tax at the end of the tax year.

Therefore, it’s important to keep information up to date and to get in touch with local authorities should your tax deducted exceed what it should be.

How to Calculate Tax on State Pension

To calculate the tax on your State Pension, you need to know how much State Pension you’re receiving, your total income for the tax year, and your tax band.

First, work out your total income, including your State Pension, any private or occupational pensions, and any other income you have, such as earnings from a job or self-employment, or income from savings and investments.

Next, subtract your personal allowance from your total income. If you’re receiving the full new State Pension, the weekly amount is £203.85, which adds up to around £10,600 over the tax year.

This will use up most of your personal allowance, with the remainder available for other income.

If your total income is less than your personal allowance (which currently stands at £12,570), you won’t pay any tax.

If your income exceeds your personal allowance, you’ll pay tax at the basic rate of 20% on the excess up to £50,270, and at the higher rate of 40% on any income over £50,270.

Dealing with Overpaid Tax on State Pension

If you’ve paid too much tax on your State Pension, you can claim a refund from HM Revenue and Customs (HMRC). This might happen if your tax code is incorrect, or if your State Pension is your sole income and less than your personal allowance.

To claim a refund, you must contact HMRC and provide details of your State Pension and any other income. If HMRC agrees that you’ve paid too much tax, they’ll refund the overpaid tax to you.

If you’ve underpaid tax, HMRC will typically adjust your tax code to collect the underpaid tax from your future pension payments. However, it is important to note that if you owe a large amount of tax, you may be asked to pay it in a lump sum.

Deferring State Pension and Tax Implications

If you reach State Pension age and choose to defer claiming your State Pension, this can have tax implications. Deferring your State Pension can increase the amount you get when you start claiming it, potentially leading to an increased tax bill.

Any extra State Pension you get from deferring is taxable, so if you have other income, this could push you into a higher tax band.

However, if your State Pension is only income and it’s less than your personal allowance, you won’t pay any tax. Additionally, depending on how long you defer your State Pension for, your personal allowance may also have increased.

It’s also worth noting that if you defer your State Pension and die before you can claim it, your spouse or civil partner may have to pay tax on any extra State Pension they inherit from you.

State Pension, Other Pensions and Taxation

State pension, along with other pensions, forms part of your total income for tax purposes. Therefore, they’re all taken into account when working out how much tax you need to pay.

If you have a private or occupational pension, these are added to your State Pension to calculate your total income. Additionally, if your total income exceeds your personal allowance, you’ll pay tax on the excess.

The way your pensions are taxed also depends on how you choose to receive your pension benefits. For example, if you take a lump sum from your private pension, the first 25% is tax-free, whilst the rest is taxable.

If you have a workplace pension, your pension provider will deduct tax before paying it to you. This is done through the PAYE (Pay As You Earn) system, the same way tax is deducted from wages.

Understanding how State Pension and other pensions are taxed can help you to plan for retirement and avoid any unexpected tax bills. Therefore, if you’re unsure about your tax situation, it’s necessary to seek advice from a tax expert or financial adviser.

FAQ

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.

UK Care Guide is really proud to have been featured on some of the UK’s leading websites.

Meet the author

William Jackson

William is a leading writer for our site, specialising in both finance and health sectors.

With a keen analytical mind and an ability to break down complex topics, William delivers content that is both deeply informative and accessible. His dual expertise in finance and health allows him to provide a holistic perspective on topics, bridging the gap between numbers and wellbeing. As a trusted voice on the UK Care Guide site, William’s articles not only educate but inspire readers to make informed decisions in both their financial and health journeys.