Is the state pension taxed?
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Yes, state pensions are taxed! This is something which many
people seem to get confused about.
In fact you may be thinking that it is slightly bizarre that the government
should choose to tax an income that comes from their coffers anyway.
However the state pension (and here we mean quite specifically the Basic
State Pension and the Additional State Pension as some other state
benefits are not subject to income tax) is treated like any other piece of
income and therefore contributes to your total tax bill in the
same way as would a pension from your employer or from an
individual pension arrangement.
Therefore if you have a private pension which is currently
paying you £5,000 a year and a full Basic State Pension of around
£4,000 per year then the total amount of your income, for the
purposes of working out your income tax, would be £9,000. State
pensions simply get added on top of whatever other sources of
income in retirement that you may have.
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If you only have a Basic State
Pension
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However if your only source of income is
from the Basic State Pension then you will not pay tax. This is
not because you are then exempt in some way but rather because
your earnings are below your
Personal Allowance.
This is not a website designed to explain the income tax
system, which is relatively complex. However it is important to
understand enough to put pensions into context and to understand
in this instance if the Basic State Pension is your only source of
income you will not pay any income tax on it.
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Income tax
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Each persons income is divided into bands to work out a persons
liability to income tax. The first 'band' is around £5,000 (more
if you are over 65) and is
free from income tax. This amount is known as the Personal
Allowance. The next £2,000 or so is taxed at 10%. The next £28,000
or so is taxed at 22% (people for whom their highest rate of
income tax is 22% are called basic rate tax payers) and anything
above this is taxed at 40% (people for whom their highest rate of
income tax is 40% are called higher rate taxpayers).
Therefore you can see that the Basic State Pension (roughly
£4,000) is less than the Personal Allowance (roughly £5,000 - more
for those over 65)
therefore if your only source of income is the Basic State Pension
then you will not need to pay income tax on it.
If you are over 65 then it is
likely that your Personal Allowance is actually large enough that
you will pay not have to pay tax on either your Basic State
Pension or your Additional State Pension if these are your only
source of income.
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Read the guide to
investment in the pensions guide. It explains what you need to
think about before investing for your retirement.
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If you have a pensions
related question then please let us
know.
If it's something other people
would find useful then we will post an answer in our Frequently Asked Question
(FAQ) area.
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Get the FREE Pension calculators from Essential Pensions.
No money, no
registration, just include one line of HTML in your web page.
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Use our online calculator
to get an estimate of your basic state pension.
Its free and
simple to use you can even include it on your own website!
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