Income Tax and Non-State Pensions

When you retire you can choose how you receive the money that you have built up in your non-state pension funds (see Non-State Pensions). You may choose to take a part of the pension fund as a lump sum. This lump sum is generally twenty-five percent of the total pension fund, and will be paid to you tax-free. The pension fund that you choose not to take as a lump sum can be used to purchase an annual pension for your retirement. For more details see Annuities.


Any annual pension you receive, both state pension (see State Pensions) and private pension, is considered to be a taxable source of income. As such it is liable for income tax, paid at a taxation rate adjusted according to your total annual income. For more information on taxable income see Income Tax. If you only have a very small private pension and a reduced state pension, you may not need to pay income tax at all, because people on a very low income are exempt from taxation. Taxable income includes:

  • Your earnings (from employment or self-employment)
  • Your pension income (whether state or personal)
  • Interest earned on savings
  • Your income from any shares you own
  • Your income from any property you rent out
  • Some state benefits, such as Income Support and Carer's Allowance

If the sum total of all your sources of taxable income is over your personal allowance for the year, you will be required to pay income tax at the appropriate rate. Your personal allowance is the amount of income you are entitled to receive each year before you must pay income tax. It is adjusted according to your age. For the tax year 2008/2009 the Income Tax annual personal allowances are:

 

 

Basic Rate

  £5,435

   no income limit

Aged 65 – 74

   £9,030

   income limit   £21,800

Aged 75 +

   £9,180

   income limit   £21,800

 

If you are over sixty-five you have a more generous personal allowance but you also have an income limit. This means that every £2 of income that you have which exceeds this limit, reduces your more generous personal allowance by £1. If you have a lot of income which exceeds the limit, your personal allowance will be reduced until it is in line with the basic rate allowance. For more detailed information see Income Tax Personal Allowance.


Income exceeding your personal allowance will be charged income tax at the following rates: 

 

 

Income Tax band
Income overpersonal allowance

Income Tax rate
on earned income

Income Tax rate
on savings

Income Tax rate
on dividends

Starting Rate
£1 - £2,230

10%

10%

10%

Basic Rate
£2,231 - £34,600

22%

20%

10%

Higher Rate
£34,601 +

40%

40%

32.5%

 

If you have a total taxable retirement earned income of £21,000 then you will be charged tax at twenty-two percent, a total of £4,620, leaving you with £16,380. For more information on these tax rates, see Income Tax Rates. In order to pay your income tax, you will need to contact your local tax office and inform them that you have begun to receive your retirement income. At the end of the year you will be required to fill out a tax return, declaring your income and determining the tax you need to pay.

For more information see Paying Income Tax, contact your local tax office, or telephone Her Majesty’s Revenues and Customs on 0845 9000 444 for assistance.