Home > Case Studies > Paying Our Pension Income Tax: A Case Study

Paying Our Pension Income Tax: A Case Study

By: J.A.J Aaronson - Updated: 27 Mar 2018 | comments*Discuss
Tax Pensions Pension Tax Tax Pension

As unfair as it may seem, pension income is taxable in exactly the same way as any other income. While pensioners are still granted the same Personal Allowances available to other taxpayers, both private and state pension income may be taxed depending on your total income. Many pensioners are unaware of the fact that they will have to pay income tax on their retirement funds. This case study focuses on one such individual.

“I was taken by surprise when my pension was taxed,” explained the pensioner, who has only recently retired, and who draws both the State Pension and an occupational pension. “I have paid tax through the payroll system for most of my working life, so I had never really given it any thought. Tax has taken a fair chunk out of the income I had banked on having.”

Personal Allowances

Having contributed to a pension scheme for the entire period for which he was working, this individual has a no insubstantial pension fund from which to draw. As such, like many thousands of pensioners across the country, his total annual income exceeds the personal allowance. The annual personal allowance is for the current tax year (2018-19) it is set at £11,850 for those aged 65 and over.

As has been mentioned, the pensioner in question draws the State Pension, but also has an occupational fund from which they draw. “I pay tax on my company pension straight out of what they pay me,” he says. Income Tax is generally paid on occupational pensions through the Pay As You Earn (PAYE) system, meaning that there is very little work for the pensioner to do. Under this scheme the Tax Office instructs the pension provider to deduct a certain amount at source, meaning that the pensioner does not have to take any steps to make payment.

Although he has had no call to do so yet, the individual in question is aware that many pensioners have been able to reclaim tax as a result of overpayments. At the end of each tax year the pensioner will receive a P60 form detailing the tax paid and the income earned. He will keep this to ensure that he can reclaim in the event that he needs to.

State Pension Tax

As he draws an occupational pension and pays tax through the PAYE System already, this pensioner has no extra responsibilities to fulfil as far as the State Pension is concerned. All of his pension income is bundled together and taxed at source by his occupational pension provider. However, if he was not paying through the PAYE system, he would have to contact HM Revenue and Customs to inform them that he needed to pay tax. This would probably mean he would have to fill out a self assessment.

“I count myself pretty lucky that I don’t have to worry about the paperwork,” he says. “I am just going to keep the forms and keep an eye on my pension slips to make sure they aren’t overtaxing me.”

Many pensioners are confused about tax matters, but don’t know where to go for advice. If you want personal information on pension taxation, Help the Aged and other related charities offer free advice. Contact your local branch for details.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
Hi, If I migrate to UK via investor programme, what is the tax implication on all my interest income and share dividends for the fund inside and outside UK? If a family composed a couple and 2 child, how much is the total tax allowance can be entitled? Is home mortgage interst deductable? Thank you
Jack - 15-Aug-13 @ 9:48 AM
I get a private pension from my work through ill health.i also get Disability living allowance they are talking about changing the benifit if i loss my disabilaty allowance can they take my company pension off me if they say i am fit enough
biffer - 5-Mar-13 @ 9:54 PM
Share Your Story, Join the Discussion or Seek Advice...
(never shown)
(never shown)
(never shown)
(never shown)
Enter word:
Latest Comments
  • Cat
    Re: How Will My Second Job Be Taxed?
    Will I still get taxed on my second job if that job's income plus my first one (and any previous one I had that year) amounts…
    13 December 2018
  • LucianoA
    Re: Should I be Paid Mileage Allowance?
    Hi, My employer doesn't pay any mileage allowance, however they offer a company car scheme. My problem is, if I…
    6 December 2018
  • Lou
    Re: How Will My Second Job Be Taxed?
    Hi, I work full time my annual income is 25,000. I am considering taking a second job, how would this effect the amount of…
    14 November 2018
  • Rjrjrj
    Re: How Will My Second Job Be Taxed?
    Hi just need advice on my 2nd job im currently working full time @37 hrs per week min wage and maybe starting 2nd job @16 hrs…
    9 November 2018
  • carol
    Re: What is My Tax Code?
    I have one job permanent but get paid 32 weeks a year. another job in the same place zero hours contract, paid 35 weeks a year I would…
    9 November 2018
  • Ellie
    Re: How Will My Second Job Be Taxed?
    We are currently on working tax credits. My husband earns 8200 and has taken a zero hours job earning roughly 2000 a year .…
    7 November 2018
  • Mikey
    Re: Claiming Tax Relief on Mileage
    I work on building sites as an employee but get no mileage allowance or extra money to cover fuel and travel in my own vehicle.…
    7 November 2018
  • tink
    Re: Can Tax Allowance Be Claimed on Work Clothes?
    Hi I work in a school as a family support worker and travel all over the Wirral supporting them in the…
    6 November 2018
  • Hellc98
    Re: Should I be Paid Mileage Allowance?
    My employer has refused to pay my mileage as they say I have not put my odometer readings on the claim forms. I have…
    5 November 2018
  • Kelly
    Re: What is My Tax Code?
    Hi, I earnt 9k and got taxed 1.1k so far in this tax year as I was on 35k for 3 months. Then I had 3 months of unemployment. And for the rest…
    31 October 2018