State Pension: How is my State Pension taxed?

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Providing you have made enough National Insurance contributions, once you reach retirement age in the UK you are entitled to receive your State Pension. To claim the State Pension you do not have to stop working, it will mean however that you don’t pay National Insurance contributions anymore. But any income you earn over the Personal Allowance, including the State Pension, is subject to tax.

What is a Personal Allowance?

The Personal Allowance is the amount every year you can earn which isn’t subject to income tax.

The standard Personal Allowance is £12,500, meaning you don’t have to pay income tax on this amount.

Depending on certain factors, your Personal Allowance may be bigger or smaller than this figure.

How much tax you pay in a year depends on how much of your income is above your Personal Allowance threshold.

Does the State Pension get taxed?

Pensions in the UK are subject to income tax.

This can include the State Pension, both the basic and the new State Pensions, but also the Additional State Pension as well.

Private pensions are also subject to tax, although some of it can be taken in a lump sum tax-free.

So you will pay tax on your pensions if your total annual income adds up to more than your Personal Allowance.

How are pensions taxed?

If you are in receipt of a State Pension and a private pension, your pension provider will remove any tax you owe before you are paid.

The pension provider will also take off tax you owe on your State Pension.

At the request of HMRC, if you have more than one pension provider one of them will be asked to take off your State Pension.

But if your State Pension is your only source of income, you are responsible for paying tax that you owe.

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You will need to complete and send a Self Assessment tax return if you owe anything.

However the Government website explains: “If you started getting your pension on or after April 6, 2016, don’t send a tax return.

“HMRC will write to tell you what you owe and how to pay.”

If you continue to work, your employer will take any tax due off your earnings and your State Pension through Pay As You Earn (PAYE).

The rate of tax you pay depends on how high your taxable income is.

Up to the Personal Allowance of £12,500, the rate of tax is zero percent.

You pay the basic rate of tax on taxable income between £12,501 and £50,000, which is 20 percent.

The higher rate of tax applies to taxable income between £50,001 to £150,000, and is 40 percent.

The additional rate of 45 percent applies to income above £150,000.

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