When it comes to pensions, paying the right amount of tax can add up to a financial headache.
With the absence of the workplace’s PAYE (Pay As You Earn) system, knowing when and how to handle your pension tax can be confusing.
Understanding pension tax requirements
Alongside State Pension, you might have to pay tax on private pensions, too.
Those born prior to 1951 (men) or 1953 (women) may also be eligible for Additional State Pension.
Post-retirement, you may have income from investment savings or occasional self-employment. If the combined income from these sources exceeds your Personal Allowance – currently £12,570 – you’ll be required to pay tax, even if you’re receiving the State Pension.
How you’ll pay
How you pay tax on your pension largely depends on its source.
For those with State and private pensions, your pension provider will usually handle tax deductions at source for both.
If you have multiple private pensions, HM Revenue & Customs (HMRC) will designate one provider to collect the tax.
If you’re employed whilst claiming State Pension, your employer will manage tax through the PAYE system.
A note on Self-Assessment
For those with other pension arrangements, like solely receiving a State Pension or having income from other investments, the tax responsibility falls on you.
This generally means completing a Self-Assessment form and sending it to HMRC, who will then inform you of your tax due, which you’ll typically pay through their online system.
There have been reports of worrisome letters from HMRC, informing taxpayers they’re being removed from Self-Assessment. This poses challenges for State Pension recipients as HMRC can’t collect tax at source, potentially accumulating an unpaid tax balance. Additionally, the static Personal Allowance combined with rising pension rates may effectively reduce real-world income.
To safeguard your pension and comply with tax regulations, it’s sensible to consult an experienced accountancy firm.