Are pensions taxed? Everything you need to know
When you retire from your job and its regular pay packet you may assume that you can put paying income tax behind you—even if you’ve been diligent in your financial planning for retirement. Many people believe that their pension income, particularly their State Pension payments, are tax-free, but this isn’t the case as our guide explains.
Do I need to contact HMRC when I retire?
Normally your employer will inform HM Revenue & Customs (HMRC) that you have retired, and your private/employee pension provider(s) should do the same once they start making payments. However, you may want to get in touch with HMRC to ensure your tax codes are correct and that you don’t over or under pay tax on your pension. Self-employed people have to contact HMRC to let them know they are retiring.
Do you pay income tax on pension payments?
Like any income, pensions are taxed once the amount goes over your personal tax-free allowance—currently £12,570 for 2024/25. After that, you are taxed at 20% on income between £12,571 and £50,270 per year. The next jump is 40% on annual incomes over £50,271 and then 45% on incomes over £125,140.
However, the State Pension for 2024/25 is £11,541.90 per year so, if you don’t receive any other income, you won’t reach the tax threshold.
It's also worth noting that you may be eligible for additional personal allowance, for instance if you are married or registered as blind.
How do you pay income tax on pension payments?
If you have a private or workplace pension, or a mix of both, then tax on your pension income is usually paid by the pension company before you receive it, a bit like when you’re employed.
Your State Pension however is paid directly into your chosen bank account without tax being taken off. If your combined income then exceeds your personal allowance you will incur tax. This might come as a surprise if you’ve been receiving a pension prior to reaching State Pension age (currently 66) and expected this additional income to be tax-free. Usually, the tax due on your State Pension is automatically deducted by your private/employee pension provider but it is worth checking if you suspect you are under—or over—paying. You’ll receive a P60 from HMRC every year explaining how much you tax you have paid.
What happens if I have more than one employee or personal pension?
Usually, HMRC will nominate one of the pension providers to pay the tax on you State Pension on your behalf.
What happens if I have income from investments or, for example, renting out a property?
You are responsible for paying tax on any income that exceeds your personal allowance. You should fill out a self-assessment tax return to declare the income. This will allow HMRC to calculate the tax owed.
What happens if I carry on working while claiming my pension?
Working either part-time or full time in addition to claiming a pension may put you over the tax threshold. Your employers will normally work out the tax for you. If you are self employed you will need to fill in a self-assessment tax return. In some circumstances it may be better to delay claiming your pension if you are earning enough from your work to live on. Talk to a qualified pension advisor or independent financial advisor for more information.
Tax on lump-sum pension withdrawals
From the age of 55 you can withdraw some or all of your private pension pot in cash and 25 per cent of that is tax free. The remaining 75% will be taxed as income and larger lump sums could push you into the higher tax bracket for that year. Always get professional advice before withdrawing money from your pension.
Inheritance and pension tax
Unspent money in a pension pot can be paid to named beneficiaries either in regular payments or as a lump sum. This money is not subject to inheritance tax (IHT) and if the person dies before they're 75 then it is usually inherited tax free. If the person dies after the age of 75 the pension is taxed as part of the beneficiary’s income.
Do you pay National Insurance when you retire?
If you want to carry on working post-retirement, you may also wonder what happens with your National Insurance. Most people stop paying National Insurance once they reach State Pension age, with the exception (sort of) of the self-employed.
Self-employed people with profits of more than £6,725 do not pay Class 2 National Insurance contributions, but pay Class 4 contributions on profits over £12,570. These will be paid until the end of the tax year (April 5th) that you reach State Pension age.
Do pensioners pay Council Tax?
Pensioners pay Council Tax if they own or rent a property, however there are discounts and exemptions available if you are on a low income or are disabled and claim certain benefits. If you live alone, you can also claim a discount. Read more about benefits pensioners can claim.
FAQs about tax in retirement
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