Pensioners > Tax essentials > How do I work out my tax?
How do I work out my tax?
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 was born in 1933 and is single. She is registered blind. For 2013/14 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 | 7,230 | 1,000 | |
| Occupational pension from local council | 4,330 | 550 | |
| State retirement pension | 5,730 | | |
| National Savings Income Bonds | 2,000 | | |
| Bank interest | 500 | 100 | |
| Dividends | 1,800 | 180 | |
| £21,590 | £1,830 | |
| Working out Amy's tax1 | £ | |
| Amy's income before tax comes to | 21,590 | |
| Less: Her allowances which are: | | |
| Tax-free personal allowance (born before 6 April 1938)2 | 10,660 | |
| Blind person's allowance3 | 2,160 | |
| Amy's taxable income | £ 8,770 | |
| Tax on pensions4 | | |
| Total pension income (7,230+4,330+5,730) | 17,290 | |
| Allowances to come off (10,660+2,160) | 12,820 | |
| £ 4,470 | |
| Tax on £4470 is: | | |
| £4,470 @ 20% | 894 | |
| Tax on Income Bonds5 | | |
| £2,000 @ 20% | 400 | |
| Tax on bank interest | | |
| £500 @ 20% | 100 | |
| Tax on dividends6 | | |
| £1,800 @ 10% | 180 | |
| 1,574 | |
| Less: Special allowances7 | 0 | |
| Less: Tax already taken off (see above)8 | 1,830 | |
| Amy's tax repayment9 | £ 256 | |
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| If Amy's pension income is £13,890 instead of £17,290 for 2013/14 - she will be able to use part of her starting rate for savings tax band so some of her interest on Income Bonds will be taxed at 10% rather than 20%. |
| Income before tax | Tax taken off | |
| £ | £ | |
| Occupational pension from BT | 5,830 | 800 | |
| Occupational pension from local council | 3,730 | 420 | |
| State retirement pension | 4,330 | | |
| National Savings Income Bonds | 2,000 | | |
| Bank interest | 500 | 100 | |
| Dividends | 1,800 | 180 | |
| £18,190 | £1,500 | |
| Working out Amy's tax1 | £ | |
| Amy's income before tax comes to | 18,190 | |
| Less: Her allowances which are: | | |
| Tax-free personal allowance (born before 6 April 1938)2 | 10,660 | |
| Blind person's allowance3 | 2,160 | |
| Amy's taxable income | £ 5,370 | |
| Tax on pensions4 | | |
| Total pension income (5,830+3,730+4,330) | 13,890 | |
| Allowances to come off (10,660+2,160) | 12,820 | |
| £ 1,070 | |
| Tax on £1,070 is: | | |
| £1,070 @ 20% | 214 | |
| Tax on Income Bonds5 | | |
| £1,720 @ 10% (2,790-1,070) | 172 | |
| £280 @ 20% | 56 | |
| Tax on bank interest | | |
| £500 @ 20% | 100 | |
| Tax on dividends6 | | |
| £1,800 @ 10% | 180 | |
| 722 | |
| Less: Special allowances7 | 0 | |
| Less: Tax already taken off (see above)8 | 1,500 | |
| Amy's tax repayment9 | £778 | |
| | |
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- The rate of Amy's income depends on the type of income she has.
- Amy's income is less than £26,100 so she gets her full personal allowance.
- Amy is registered blind and so she gets an extra allowance.
- 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.
- 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.
- Dividends are taxed at 10% unless you are a higher or additional rate taxpayer. Amy pays tax at 10% on the amount of her dividends.
- Amy has no special allowances.
- 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 was born in 1934 and is married to Jill. Will's income for 2013/14 is as follows: |
| Income before tax | Tax taken off | |
| £ | £ | |
| Personal pension (from when Will was self employed) | 8,000 | 1,390 | |
| State retirement pension | 9,600 | | |
| Building society | 300 | 60 | |
| National Savings Income Bonds | 1,500 | | |
| Purchased annuity - income element | 2,000 | 400 | |
| £21,400 | £1,850 | |
| | | |
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| Working out Will's tax | | |
| £ | |
| Will's income before tax comes to | 21,400 | |
| Less: His allowances which are: | 10,660 | |
| Will's taxable income | 10,740 | |
| Tax on pensions1 | | |
| Total pension income (8,000+9,600) | 17,600 | |
| Allowance to come off | 10,660 | |
| 6,940 | |
| Tax on £6,940 is: | | |
| £6,940 @ 20% | 1388 | |
| Tax on Income Bonds | | |
| £1,500 @ 20% | 300 | |
| Tax on building society interest | | |
| £300 @ 20% | 60 | |
| Tax on purchased annuity | | |
| £2,000 @ 20% | 400 | |
| 2,148 | |
| Less: Special allowances2 | 791 | |
| Less: Tax already taken off (see above) | 1,500 | |
| Will's tax repayment | £ 143 | |
- 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.
- Will gets married couple's allowance of £7,915 and so he can get £7,915 divided by 10 = £791.50 taken off his tax bill. Will gets the full allowance as his income is not high enough to trigger any restriction.
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