You might be wondering whether you pay income tax on your pension or not. Once you retire, you’ll still be required to pay income tax on any additional income from your personal allowance.

Many individuals believe that once they retire, they won’t need to pay tax – but this isn’t true. To learn more about income tax on pensions and why you need to pay it, continue reading.

What is Income Tax?

What is income tax? Essentially, income tax is a type of tax that you pay on your taxable income. Typically, we’re required to pay tax on things like income from employment, some state benefits, and any income from a trust, to name a few. You also pay tax on some pensions, including:

State pensions
Company pensions
Personal pensions
Retirement annuities

You shouldn’t avoid paying taxes. We’re all required to pay it, and failing to do so can result in fines and penalties from HMRC. It’s quite rare to be sent to prison for tax evasion, but HMRC can still take things further by taking your possessions if necessary – something that’s known as distraint.

Receiving State Pension

In the UK, you receive your state pension in your late 60s. As of 2024, the state pension age is 66 years old – but this is set to increase gradually by May next year. A few months before you reach the state pension age, you should receive a letter from the Pension Service.

This letter provides you with information on how to claim your pension. It’s the Pension Service that can deal with any issues regarding your pension income. Along with a state pension, you might have also been paying into a private pension, too.

State pensions in the UK are paid by the government, but if you decide to have a personal pension, you’ll need to pay monthly payments or lump sums to a pension provider. Undoubtedly, personal pensions help increase your pension pot.

Paying Income Tax on Pensions

You will have to pay income tax if your total annual income adds up to more than your personal allowance. Your total income includes pensions, whether it be a state pension (both basic and new state pensions) or a private pension.

It also includes additional state pensions, taxable benefits you receive, any earnings from being employed or self-employed, and income from investments.

Part of some private pensions can be taken tax-free – typically, you can take anywhere up to 25% of the amount in any pension as a tax-free lump sum. It’s important to note that the tax-free pension lump sum will not affect your personal allowance.

How is Tax Paid on Pensions?

How is tax paid on pensions? As soon as you start withdrawing money from your pension, you will pay tax like you would while employed. Typically, your pension provider will tax money in your pot, just as employers are often taxed.

Using your tax code, your provider will calculate how much income tax you pay. They might also take off any tax that’s due on your state pension. In some cases, you might have to pay emergency tax – however, this can be reclaimed through HMRC.

If your income is only coming from your state pension and the amount is below what your personal allowance is, you likely won’t have to pay tax. If you are required to pay tax, you’ll be able to see how much you’ve paid by checking your P60 at the end of the tax year.

It’s possible to pay too much tax on your pension, which is why it’s so important to check how much you’ve paid at the end of the tax year. If you’ve paid too little or too much tax than necessary, HMRC will likely get in touch. They’ll direct you on how to get a refund or pay the amount of tax that you owe.

Can You Still Work and Receive Your Pension?

Yes, you can still work and receive your state pension. In 2023, 55,000 more 65-year-olds remained in work as they reached the state pension age. Essentially, anyone can continue working past the state pension age if they want to.

Whether you simply enjoy your job or need extra income, working and receiving a state pension is common. It’s important to note that you can only access your pension and continue working if:

You’ve reached the state pension age, which is currently 66 (if you’re claiming the state pension)
You’ve reached the age agreed with your pension provider (private pension, etc)

If you continue working past the state pension age, you will no longer have to pay national insurance contributions. Ultimately, this means that you’ll be taking home more money at the end of the month – something that’s beneficial for those working past the state pension age.

Taking money from your pension and continuing to work comes with numerous benefits. Let’s see what some of the main benefits of taking your pension while still working are:

You probably won’t have to work full-time thanks to extra income from your pension pot
You might have more money left over after paying off expenses, such as your mortgage
If you don’t take all of your pension out, it can continue to increase
You could not take your state pension at all until later while you’re still working (known as deferring)

Professional Tax Advice from DH Business Support

Taxes can be complex to understand – however, the team at DH Business Support is here to help. Our team consists of professional accountants who are here to provide a service like no other. Simplifying the world of tax, we offer expert advice, guidance, and support to clients.

Understanding your taxes is vital – we should all know what we’re paying and why. If you’ve recently withdrawn from your pension and require specialist tax advice from a team of experienced professionals, look no further than DH Business Support.

With in-depth knowledge across a vast range of different areas of tax, we can help you better understand your taxes and plan ahead efficiently.

If you require more information about our services, we encourage you to get in touch with us today! We look forward to speaking shortly.