For most pensioners with simple tax affairs the way the tax calculation works is as set out below. Remember that the tax year runs from 6 April one year to 5 April the next.

Once you feel comfortable with the various stages in the tax calculation process you may want to check your understanding by having a look at 2 simple examples, which follow.

Amy - occupational pensions - state pension - savings income Amy is aged 80 and single. She is registered blind. For 2008/09 she has the following income - we look at two different amounts of income so you can see how the starting rate for savings of 10% can affect your tax bill: Income before tax Tax taken off £ £ Occupational pension from BT 6,000 800 Occupational pension from local council 3,500 420 State retirement pension 4,100 National Savings Pensioner Bonds 2,000 Bank interest 500 100 Dividends 1,800 180 £ 17,900 £ 1,500

Working out Amy's tax1		£
Amy's income before tax comes to		17,900
Less: Her allowances which are:
Tax-free personal allowance (over 75)2		9,180
Blind person's allowance3		1,800
Amy's taxable income		£ 6,920
Tax on pensions4
Total pension income (6,000+3,500+4,100)		13,600
Allowances to come off (9,180+1,800)		10,980
		£ 2,620
Tax on £2,620 is:
£2,620 @ 20%		524
Tax on Pensioner Bonds5
£2,000 @ 20%		400
Tax on bank interest
£500 @ 20%		100
Tax on dividends6
£1,800 @ 10%		180
		1,204
Less: Special allowances7		0
Less: Tax already taken off (see above)8		1,500
Amy's tax repayment9		£ 296

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If Amy's pension income is £400 less for 2008/09 so £17,500 instead of £17,900 - she will be able to use part of her starting rate for savings tax band so some of her interest on Pensioner Bonds will be taxed at 10% rather than 20%. Income before tax Tax taken off £ £ Occupational pension from BT 5,600 800 Occupational pension from local council 3,500 420 State retirement pension 4,100 National Savings Pensioner Bonds 2,000 Bank interest 500 100 Dividends 1,800 180 £ 17,500 £ 1,500

Working out Amy's tax1		£
Amy's income before tax comes to		17,500
Less: Her allowances which are:
Tax-free personal allowance (over 75)2		9,180
Blind person's allowance3		1,800
Amy's taxable income		£ 6,520
Tax on pensions4
Total pension income (5,600+3,500+4,100)		13,200
Allowances to come off (9,180+1,800)		10,980
		£ 2,220
Tax on £2,220 is:
£2,220 @ 20%		444
Tax on Pensioner Bonds5
£100 @ 10% (2,320-2,220)		10
£1,900 @ 20%		380
Tax on bank interest
£500 @ 20%		100
Tax on dividends6
£1,800 @ 10%		180
		1,114
Less: Special allowances7		0
Less: Tax already taken off (see above)8		1,500
Amy's tax repayment9		£ 386

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1. The rate of Amy's income depend on the type of income she has
2. Amy's income is less than £21,800 so she gets her full personal allowance
3. Amy is registered blind and so she gets an extra allowance
4. This is the income on which Amy pays her highest rate of tax so we take her allowances from her pensions first so that she pays as little tax as possible.
5. We use savings income before any tax is taken off when working out Amy's tax. In the second example Amy still has part of her starting rate for savers unused so part of her interest is taxed at 10%. If you would like more information on how the starting rate for savers works you can find that here.
6. Dividends are taxed at 10% unless you are a 40% taxpayer. Amy pays tax at 10% on the amount of her dividends.
7. Amy has no special allowances
8. This is the tax taken off Amy's income before she receives it so we need to take this off her tax bill.

Will - Personal pension - purchased annuity Will is aged 68 and is married to Jill. Will's income for 2008/09 is as follows: Income before tax Tax taken off £ £ Personal pension (from when Will was self employed) 6,000 1,040 State retirement pension 8,500 Building society 300 60 National Savings Income Bonds 1,500 Purchased annuity 2,000 400 £ 18,300 £ 1,500

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Working out Will's tax
		£
Wills's income before tax comes to		18,300
Less: His allowances which are:		9,030
Will's taxable income		9,270
Tax on pensions1
Total pension income (6,000+8,500)		14,500
Allowance to come off		9,030
		5,470
Tax on £5,470 is:
£5,470 @ 20%		1,094
Tax on Income Bonds
£1,500 @ 20%		300
Tax on building society interest
£300 @ 20%		60
Tax on purchased annuity
£2,000 @ 20%		400
		1854
Less: Special allowances2		653
Less: Tax already taken off (see above)		1,500
Will's tax repayment		£ 299

1. This is the income on which Will pays his highest rate of tax so we take his allowances from pensions first so that he pays as little tax as possible.
2. Will gets married couple's allowance of £6,535 and so he can get £6,535 divided by 10 = £653.50 taken off his tax bill. Will's will get the full allowance as his income is not high enough to trigger any restriction.

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