What is income?

The most common types of income for a pensioner are:

• State retirement pension (SRP). This pension is taxable.
• An occupational pension paid by a previous employer or pension company. These pensions are almost always taxable.
• Income from bank or building society deposits. These are usually taxable.
• Pension credit. This is not taxable.
  

Although we have taken the most common types of income, we have used words like "almost always" or "usually" to explain the tax position. This is because the tax system has many exceptions and it can be sensible to review our analysis of generally tax free and commonly taxable income which is to be found at the end of this page.

The topics covered in this section are:

State retirement pension

How am I taxed on my occupational pensions and retirement annuities?

Which state benefits can I claim and how are they taxed?

Income from savings - how am I taxed?

Bank and building society interest

National Savings or other untaxed interest

Company dividends

State retirement pension (SRP)

• To get more information about how your state retirement pension works in the first year you receive it please have a look at the section on Retiring shortly.
• If you are thinking of deferring your state pension, you can find more information on this using the link.
• If you have deferred state pension and opt to take a lump sum you need to know how it will be taxed - use the link to find some information and examples.
• If you have capital gains in the year you take the lump sum you need to know how these will each be taxed. Have a look at Lump sum state pension and capital gains for more information on this.
• Always keep any paperwork you are sent which tells you what your SRP will be for any tax year, as you will find this useful if you need to complete a tax return or repayment claim.
• Your SRP is taxable, but it is also paid with no tax taken off before you get it. If your income including your SRP is less than your tax allowances (these are explained in Tax allowances) you will probably not need to pay any tax at all.
• If your income including your SRP and any other pensions is more than your tax allowances you may need to pay some tax.
• If you also receive a company pension (often called an occupational pension), the tax due on your SRP will be collected from your other pension when it is paid to you. This may make the tax seem high on your occupational pension but this is because HMRC collect tax on two pensions from the one payment.
• Please check the figure of SRP shown on your coding notice. HMRC does not always know the exact amount you are due to receive in the tax year.
• To help avoid any problems - make sure you tell HMRC in writing whenever you receive a new pension.
• If you are thinking of retiring abroad you should use this link for information on how your state pension will be taxed and use this link for information about increases in state pension when you are living abroad.

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How am I taxed on my occupational pensions and retirement annuities?

You may get an occupational pension because you were in your employer's pension scheme, or maybe you paid amounts yourself to a personal pension plan. If you had a pension plan that you set up before July 1988, this will be called a retirement annuity policy and you will be receiving a retirement annuity.

• Use the link to find out what happens in the first year you get SRP and an occupational pension or retirement annuity.
• Your occupational pensions, personal pensions and retirement annuities are taxed before you get them.
• With occupational pensions and personal pensions, HMRC tell your pension payer how much of your tax allowances they are able to take off the pension before it is taxed. They send you a coding notice (form P2). However this system is not foolproof and it is worth reading our article which commented on the fact that at least 600,000 pensioners have for years had the wrong amount of tax taken off their pensions.
• You will only pay tax on the balance of your pension after tax allowances are taken off. If you were employed before retirement, you will see that it is the same system which was applied to your wages or salary under Pay As You Earn (PAYE).
• If you are receiving SRP, HMRC will collect the tax due on this at the same time as the tax due on the occupational or personal pension. Here is an example of how they do it.

  Donald - state pension - occupational pension Donald aged 70 and single receives only a company pension of £8,000 a year and state pension. His state pension for 2012/13 was £5,310. We work out what allowances can be set against Donald's company pension like this: £ Allowances for 2012/13 10,500 Less: state pension 5,310 Allowances to go against company pension 5,190

  • After the end of the tax year you will get a form P60 or annual statement showing your total pension and tax deducted. You should keep this form safe in case you need it to fill in a tax return or repayment claim.
  • All retirement annuities are taxed under PAYE - just like a personal or works pension.
  • Use the link for more information if you are thinking of retiring abroad.
  
  

  Tax Tip If you reached the ages of 65 or 75 during 2012/13 you will be entitled to the respective higher Personal Allowance for that year. Check your coding notice to see that you are receiving the higher allowances. Foreign pensions are usually taxed on only 90% of the sums paid to you. Do check that you are getting the reduction if you have a pension being paid from overseas.

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  Which state benefits can I claim and how are they taxed?

  • Most, but not all, state benefits for pensioners are tax-free. Benefits are usually paid because you have a low income or for health reasons. Use the link if you would like details of the most common benefits and whether they are taxable.
  • It is worth checking that you are not including any of these tax-free items in figures that you supply to HMRC. Sometimes on pension statements both taxable and tax-free items are shown.
  • The most recently introduced state benefit is the pension credit and you will also find more information about the credit using the link.
  
  

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  Income from savings - how am I taxed?

  • Normally we say that earned income is a pension, income from your job or from self-employment. The rates of tax that normally apply to earned income are 20% and 40% .
  • Income from savings is taxed differently from earned income. Income from savings includes interest from banks, building societies, interest on UK government investments, company dividends, or income from property.
  • The rates of tax that normally apply to savings income are the special savings rate of 10%, 20% and in some cases, the higher tax rate of 40% .
  • Use the link to get more information on tax rates.
  • Your bank or building society will take off tax at 20% before they pay you your interest. Use the link to see how bank and building society interest is taxed.
  
  

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  National Savings or other untaxed interest

  Most of the savings income under this heading (does not include interest on Guaranteed Income Bonds and the Guaranteed Growth Bonds which are both paid with tax taken off) is paid to you without tax taken off so it is likely that you will have more tax to pay. If your income is very low and your tax allowances are higher, you may not need to pay tax at all. Use the link if you would like more information.

  • If you have more tax to pay (use the link for more information on this) HMRC will either collect it through your PAYE code. or by sending you a tax return to complete followed by a tax bill.
  
  

  Betty - NS Income bonds - occupational pension Betty pays tax at 20% - for 2012/13 her income before allowances is £15,000 including an occupational pension of £10,000. She receives interest from National Savings Income Bonds of £2,000. This amount is paid with no tax taken off but Betty will have to pay tax and it will be collected through the coding notice for her occupational pension.

  
  

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  Company dividends

  If you receive company dividends (or unit trust distributions), these will be paid to you with a tax credit of 10% taken off. You can find more information on dividends using the link.

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  Generally tax-free income

  Benefits

  Benefits in respect of children

  Carer's allowance – child dependency addition

  Child benefit

  Childcare vouchers (up to £55 per week)

  Child dependency additions paid with state retirement pension or other social security pensions

  Child's special allowance

  Child tax credit

  Child trust fund income or any gains (profits) until child is 18

  Education maintenance allowance (there are separate allowances for England, Scotland, Wales and NI) - the scheme is now closed to new applicants in England

  Fares to school

  Guardian's allowance

  Health in pregnancy grant

  Maternity allowance

  School uniform and clothing grants

  Sure start maternity grant

  Industrial Injury benefits

  Constant attendance allowance

  Industrial disablement benefit

  Pneumoconiosis, byssinosis and miscellaneous disease benefits

  Workmen's compensation supplement

  War Disablement Benefits

  Constant attendance allowance

  Disablement pension

  Severe disablement allowance

  Other benefits

  Age related payments (paid at the discretion of the government from time to time)

  Attendance allowance

  Bereavement payment

  Budgeting loans (Social Fund payment)

  Christmas bonus

  Cold weather payments

  Community care grants (Social Fund payment)

  Council tax benefit

  Crisis loans (Social Fund payment)

  Disability living allowance

  Employment and Support Allowance - income related

  Eye tests

  Funeral expenses payments (Social Fund payment)

  Home Energy Efficiency Scheme (Wales)

  Hospital patients travelling expenses under the Hospital Travel Scheme

  Housing benefit

  Housing grants

  Incapacity benefit (initial 28 week period and benefit paid to those who were receiving the former invalidity benefit at 12.04.95 for the same incapacity)

  Income support (taxable if paid whilst claimant on strike)

  Job finders grant

  Low cost bus passes

  Pension credit

  Reduced earnings allowance

  Redundancy payment

  Television licence payment for over 75s

  Vaccine damage (lump sum)

  Warm Deal (Scotland)

  Warm Front grant (England)

  Warm Homes (N Ireland)

  War widow's or dependant's pension

  Winter fuel payment

  Working tax credit

  Other non-savings income

  Adoption allowances

  Compensation, damages or interest (up to the time of judgement) for personal injuries (whether received in one lump sum or over a period) and whether awarded by a court of out of court settlement

  Compensation for loss of employment – the first £30,000. This includes redundancy payments both statutory and in some cases pay in lieu of notice. (Any payment over the £30,000 limit is taxable)

  Compensation and interest for mis-sold personal pensions taken out between 29 April 1988 and 30 June 1994 inclusive

  Educational grants or scholarships

  Employer sponsored courses - up to £15,000

  Foreign pensions and lump sums paid under overseas pension schemes in certain circumstances - 10% of the pension or lump sum

  Foreign social security benefits – a large number are exempt

  Foster care receipts below specified limits

  Friendly Societies – any gains on qualifying insurance policies

  Gallantry awards – annuities and additional pensions paid to holders of the Victoria Cross, George Cross and most other gallantry medals are free from tax

  German and Austrian annuities and pensions for victims of Nazi persecution

  HM Forces – mess and ration allowances

  Holocaust victims - compensation paid by banks on frozen accounts

  Insurance benefits paid to a person who is sick, disabled or unemployed, to meet her/his financial commitments. These include benefits paid under mortgage protection insurance, permanent health insurance, payment protection (credit) insurance and long-term care insurance

  Jurors' financial loss allowance, when the juror is an employee

  Life Assurance policies - certain bonuses and profits

  Local authority home improvement grants

  Long Service awards where the gift does not exceed £50 for each year of service and which is a tangible gift e.g. a clock or shares in a company (for service of 20 years or more). A cash award is usually taxable unless it is a one off payment which is not in the contract of employment

  Lottery, football pools and other betting winnings e.g. from horseracing

  Lump sum pension payments (maximum 25% of the capital value up to the trivial commutation limit - £18,000 for 2012/13 to 2015/16)

  Luncheon vouchers of up to 15p per working day

  Maintenance payments following divorce or separation

  Miners' free coal or cash in lieu of coal is tax-free under an HM Revenue and Customs (HMRC) concession

  Pensions including voluntary pensions which are not connected to a past job and to which the taxpayer contributes annually are tax-free. Disability pensions of members of the armed forces are tax-free. Any pension awarded to an employee on retirement because of an injury at work is free of tax

  Premium Bond prizes

  Purchased annuities - capital element of amount received

  Rent a Room Scheme – the first £4,250 of income

  Repayment supplement in connection with overpaid tax – interest

  Sickness and unemployment insurance policies -benefits paid

  Strike pay and unemployment pay from trade unions

  Thalidomide Trust payments to victims of thalidomide

  Wounds and disability pensions

  Some savings and investments income sources

  For certain individuals who are not domiciled in the UK , as long as income from overseas is not brought into the UK, it may be treated as tax free here

  Government Savings Certificates income

  Individual Savings Accounts (ISA) income

  Insurance policies or investment bonds -withdrawal tax free up to 5% of the amount originally invested

  National Savings (NS&I) Certificates income

  Save As You Earn schemes - interest and terminal bonuses

  Shares or share options issued under HMRC approved employer schemes

  Income from certain UK Government stocks (gilts) where the person receiving the money does not normally live in the UK

  Tax Reserve Certificates interest

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  Commonly taxable income

  Earned income

  Main sources

  Benefits in kind e.g. company cars (over £8,500 earnings (including benefits) per year). In certain circumstances benefits are taxable for those earning less than £8,500.

  Bonus or commission, including tips

  Pensions from occupational pensions

  Private pension income or pensions from personal pension plans or retirement annuity policies

  Profits from self-employment

  Wages and salaries (including holiday pay)

  Other sources of earned income

  Backdated pay awards

  Expenses not totally and necessarily incurred to do the job made by the claimant's employer including:

  • Travelling expenses between the claimant's home and place of employment
  • Expenses incurred for the care of a member of the claimant's family, such as child minding costs

  Non-cash vouchers that are liable for Class 1 NI contributions

  Payment in lieu of remuneration, such as a payment made by a liquidator when a company has been wound up and employees are owed earnings

  Permitted earnings

  Protective awards which may be ordered by an Industrial Tribunal if an employer has not given a trade union the statutory notice of redundancies, or a payment which may be made to an ex-employee from the Redundancy Funds if an employer goes into liquidation

  Redundancy/leaving payments over £30,000

  Retainers - a retainer is a payment made for a period when no actual work is carried out, such as payment made to employees of the school meals service during school holidays

  State benefits

  Bereavement allowance

  Carer's allowance

  Employment and support allowance (contributory and youth ESA)

  Incapacity benefit (except for first 28 weeks and those who were receiving the former invalidity benefit at 12.04.95 for the same incapacity)

  Income support (when paid to someone involved in a trade dispute who is claiming it for their partner)

  Industrial death benefit pensions

  Jobseeker's allowance – both income and contribution based up to a taxable maximum

  Invalidity allowance when paid with state retirement pension

  State retirement pension and most other state pensions

  Statutory adoption pay

  Statutory maternity pay

  Statutory paternity pay

  Statutory sick pay

  Widowed mother's allowance

  Widowed parent's allowance

  Note that additions for dependant children with any of the above benefits are not taxable but an addition for a spouse or civil partner is taxable.

  Savings and investment income

  Bank, building society or local authority interest

  Dividends from shares

  National Savings and Investments – interest on most products

  Property letting - most income (including rent a room where income is over £4,250 per year and second homes)

  Purchased annuities - income element

  Taxable gains on life assurance policies

  Trust /settlement income

  UK companies - interest

  UK Government stocks (gilts) interest

  UK units trusts (both interest and dividends)

  Other non-savings income

  Motor mileage allowance profits paid to volunteer drivers

  Pre owned assets

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