Pensions and Tax

Published:  29 Oct at 7 PM
Pensions have always been quite a complicated area for individuals to wrap their head around, a problem that isn’t helped by the wide variety of options. The basic State Pension that you receive from the government when you turn 65 (soon to change to 66) is based on the National Insurance contributions you've paid, or have been credited with, during your working life.

When you reach State Pension age you no longer pay National Insurance contributions, but you don't automatically stop paying Income Tax. If your taxable income (as the name suggests, the amount of money you earn that would normally be subject to tax including your State Pension) is more than your tax-free personal allowance you're still a taxpayer regardless of your age and you should get in touch with the HM Revenue & Customs (HMRC) if you're not already paying this tax.

Remember, your personal allowance may also change depending on your age so it’s important that you keep an eye on new developments, particularly when reaching an important age such as 65 as it is the personal allowance that determines how much tax you will be due to pay. If your tax-free allowances are the same as or more than your taxable income, you are not required to take any action but If you think that you shouldn't be paying tax on some or all of your income but are, you may be able to claim a tax refund for the amount that you are owed. Even if you feel that you have been paying more than necessary for several years, you can still get it back as the tax refund process allows claims to go back as far as six years.

It's important that you fill in the form HMRC sends you just before you reach the State Pension age (form P161 Pension Coding) which requests that you give various details of your income so that HMRC can make sure you are paying the right amount of tax from State Pension age. If you have reached the state pension age and have still not received the P161 Pension Coding form, you should get in touch with your local tax office and request one.

If you get another pension (like a retirement annuity or a personal or company pension) and you pay tax on this, you'll usually pay tax on your State Pension at the same time. This is done through the PAYE (Pay As You Earn) scheme. Your Tax Office sends a tax code to your pension payer to show them how much tax to take off, including any due on your State Pension. This might make the tax on your company or personal pension seem high but it's because it includes the tax due on your State Pension.

If your pension is taxed through your employer or your pension payer you'll receive a PAYE Coding Notice (form P2) from your Tax Office at least once a year telling you your tax code. It's important to check this to make sure it shows the right amount of tax on your State Pension. Follow the links below to find out more.

Retirement Annuity »