Tax on Pension Payments
Back to pension tax.
As explained on the previous page, you are liable to pay income tax on your pension payments once you reach retirement age, as it is classed as a taxable income. Of course, like your wages, you do have a rate of income below which you pay no tax, and you can see the allowances by clicking on this link: income tax allowances. You should note that your tax free allowance rises a little once you reach 65.
Working out whether you should pay tax is fairly simple, by following these steps:
Add together all your TAXABLE income*
Deduct your tax-free allowance
If your taxable income is more than your allowance, then you have to pay tax on the balance.
* Taxable income includes such things as:
ALL pension income (if you have more than one pension plan)
Any employment (some people take part-time work to supplement their pension),br/>
Interest on savings
Dividends (income from any shares)
Income from property (such as rental income, but not the first £4,250 if you rent out a room in your home)
Income from abroad
Some state benefits
Income that is not taxed includes:
Some state benefits such as pension credits, working tax credits and child tax credits
Income from ISAs, PEPs or TESSAs
Interest from National Savings certificates
Interest from SAYE
Premium Bonds or National Lottery winnings
Lump sum pension payments
Paying too much pension tax
With some pension payments, such as purchased life annuities, 20% tax will automatically be deducted before you receive it. If you are below the income threshold you will need to make a claim to get your tax back, and you should contact the HMRC to find out how.
Back to pension tax.
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