Taxation and Pensions
Unfortunately, just because you are no longer working does not mean that you will no longer be paying tax. State, personal, and company pensions are all subject to tax. How much tax you pay will depend on your pension income, which type of pension you are receiving and your total income. For many people taxation and pensions can be confusing subject but it can be simplified if you know how.
State PensionsYou will receive your state pension without tax taken off. However this pension is taxable income and this also applies if you receive a state pension based on your husband’s National Insurance contributions. There may be some circumstances where you will not need to pay tax on you state pension, usually if your total income is less than your tax allowance.
Should you be Paying Tax?You can work out whether or not you should be paying tax during your retirement by sitting down and calculating your total income. The first step is to add up all of your taxable income; this will consist of your state pension, any private or occupational pensions, and any income from property and benefits, such as Incapacity Benefit. Taxable income will also include income from any employment you do, and building society or bank interest.
Next you should work out your tax free allowances, which includes a personal allowance and a blind person’s allowance. The basic personal allowance is the same for everyone but if you are over 65 with an income below a certain limit then this allowance will increase. You can find the most recent information on personal allowances on the government’s Direct Government website.
The Tax FormulaThe final step to working out whether you should pay tax is to subtract your tax free allowance from your taxable income. Once you have subtracted this then if the amount you are left with is more than your tax free allowances you will have to pay tax.
Taxation and Working after RetirementThere is no law that states you must stop working once you have reached retirement age, and you can still receive your state pension while working. Your employment income will be counted as taxable income, along with your state pension. Once again, the amount you are taxed will depend on your total income against your tax allowance. You can delay taking your state pension; the longer you delay, the higher the rate of pension you will receive when you do start claiming.
Incentives to Delaying your PensionIf you decide to defer taking your pension then you can either claim a larger pension later or take the deferred pension as a tax free lump sum. If you take the lump sum option then you will then receive your deferred pension at the normal rate. To qualify for the lump sum you must defer your pension for at least 12 months; this figure is five weeks deferment if you wish to receive the higher pension rate.
Tax on more than one PensionIf you have more than one pension, say a state pension and an occupational pension, then the tax will usually only be taken from one of the pensions. This tax is usually payable on the state pension through your own pension’s Pay As You Earn Scheme (PAYE). You pension provider will have been informed by the tax office of your tax code and how much to take off.
Tax and Pensions AbroadRetired people who move abroad can still claim their pension quite easily. Your pensions will still be taxable in Britain unless there is an agreement with the country you have retired to called ‘double taxation’. If there is an agreement then you will pay tax in your retirement country. If you are moving abroad always inform your pension providers of your plans before you move.
Taxation and pensions do not need to be a confusing issue as long as you make sure you have the right tax code and all of the relevant information. There may be tax allowances that can be claimed, and you can receive information and find out if you are eligible by contacting the Department of Work and Pensions.