Income Tax and Pensioners

When the age has been reached at which the State Pension is granted a significant proportion of the population choose to retire. It is perfectly understandable that, bearing in mind that the government is giving them money, they would not expect to continue to pay tax. However, pension income is taxable in the same way as any other form of income.

Pension income, whether it is from the State Pension or from a private or employer’s pension scheme, is subject to Income Tax. This can seem like a strange case of the state giving with one hand and taking away with the other, particularly when it is noted that the State Pension is paid to pensioners without tax deductions. This means that the amount that you receive from your State pension will not be the amount that you ultimately benefit from; rather, you have a subsequent responsibility to pay tax on that income.

Employment Status

There are different rules depending on both your employment status and on whether or not you also benefit from a private pension. The most common scenario is that the State Pension is being given to an individual who benefits from no other pension scheme, and is not in employment. In this case, the recipient will be required to fill out a self assessment tax return towards the end of each tax year. If this will be the first time you have been a self assessment tax payer, the process can appear daunting. However, your Tax Office will be able to help; contact them as soon as possible and they will provide you with the necessary forms when the time comes.

If you are benefiting from no other pension than the State Pension, but you are still in employment, then your affairs are much easier to deal with. In these cases, your Tax Office will contact your employer in order to arrange that the tax you must pay on your State Pension be deducted directly from your earned income, through PAYE. This streamlines the process and means that you have no paperwork responsibilities.

Multiple Pensions

Finally, if you are receiving the State Pension and are also benefiting from a private or employer’s pension scheme, the Tax Office will again attempt to contact the relevant parties in order to minimise your responsibilities. In these cases, your tax will be deducted from your other pension income, through your pension provider’s own PAYE scheme. If you notice that your private pension payments are lower than usual, this may well be the reason. If you only receive one private pension then the entire tax bill will come from this single source. If, on the other hand, you are benefiting from a number of different pension schemes, your Tax Office may have to split the payments across a number of different sources. In practice, however, the majority of people in this situation find that one of their pensions is taxed heavily while the others are untouched. Again, if you are a multiple pension recipient, you will not be required to fill out a self assessment tax return.