What income is taxable?
You do not have to pay tax on all of your income. In tax terms, some income is called ‘taxable’, which means it forms part of your total taxable income (though sometimes no tax may be due if the income falls within your allowances or is taxed at 0%). Other income is ‘non taxable’, ‘not taxable’, ‘exempt’ or ‘tax-free’. This means you do not include the income in your total taxable income and therefore you do not have to pay tax on it. This page deals only with income that you get from pensions and related items.
Normally, income from pensions, including the state pension, is taxable.
If you want to know whether other different types of income are taxable or not, go to the tax basics section of our website. Tax credits are not taxable income but some other state benefits are – to find out the details, visit our section on tax credits and benefits.
This page deals only with income that you get from pensions and related sources.
What ‘pensions’ income is taxable?
The following list includes ‘pensions’ income that is normally taxable.
- Pension income – from occupational pensions, private pension schemes, personal pension plans or retirement annuity policies. Your pension provider takes off tax under the Pay As You Earn (PAYE) system, before paying you the pension. It does not matter how frequently you receive your pension. Your pension provider should give you a form P60 at the end of each tax year, showing your pension and the tax taken off. If you have taken out the full pension fund and nothing is left, your pension provider should give you a form P45. You do not pay National Insurance contributions (NIC) on your pension income. There is more information on forms P60 and P45 on GOV.UK. Although the GOV.UK page refers to employers only, pension providers are required to provide the same forms.
- Foreign pensions and lump sums paid under overseas pension schemes, although you may have been entitled to a deduction of 10% in tax years up to and including 2016/17. You should also consider your residence and domicile position and the terms of any relevant double taxation agreement.
- Industrial death benefit (IDB) – pensions payable under this scheme are taxable as pension income. IDB was abolished with effect from 11 April 1988. Pensions already in payment at that date continue to be paid.
- State pension and most other state pensions – for those who reached state pension age before 6 April 2016, the state pension is made up of a few elements:
- the basic pension;
- additional pension;
- up-rating of guaranteed minimum pension;
- graduated retirement benefit or pension;
- age addition;
- increase for dependants; and
- extra pension as a result of deferral.
Most of these elements are taxable, but increases for dependent children are not taxable.
For those who reach state pension on or after 6 April 2016, the new state pension is paid. It is paid at a flat rate and does not include the above elements.
- State pension lump sums, arising as a result of deferral.
- Purchased life annuities – income element. Purchased life annuities are not pension annuities. You can buy them using your own savings, rather than savings from a pension fund. Part of the money you receive is treated as income, and the other part is treated as a repayment of your investment. Only the income element is taxable. As it is taxed as savings income, it can count towards your personal savings allowance (also called ‘savings nil rate’). Any part of it within that allowance is therefore taxed at 0%, with the balance being taxed at 20% if you are a basic rate taxpayer. You normally receive the income element net of 20% tax.
What ‘pensions’ income is tax-free?
The following list includes income that is normally tax-free.
- Child dependency additions paid with state pension or other social security pensions.
- Christmas bonus for pensioners.
- Cold weather payments.
- Pension credit – there is more information on pension credit on the GOV.UK website. You can also use the pension credit calculator on GOV.UK to see how much pension credit you might get.
- War widow's or dependant's pension.
- Winter fuel payment.
- For tax years up to and including 2016/17, foreign pensions and lump sums paid under overseas pension schemes in certain circumstances – 10% of the pension or lump sum. You should also consider your residence and domicile position and the terms of any relevant double taxation agreement, under which the UK's right to tax the foreign pension may be restricted if you are resident overseas.
- 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.
- Lump sums from UK approved pension schemes up to 25% of the capital value.
- Wounds and disability pensions of members of the armed forces are tax free.
- Any increased pension awarded to an employee on retirement because of an injury at work is free of tax.
- Purchased life annuities – capital element. Purchased life annuities are not pension annuities. You can buy them using your own savings, rather than savings from a pension fund. Part of the money you receive is treated as income, and the other part is treated as a repayment of your investment (capital element). Only the income element is taxable; the capital element is tax-free.
Where can I find more information?
For more information on various different types of taxable and tax free income, you may find these sections of our website helpful:
- Tax basics – what income is taxable?
- Self-employment – how do I work out my taxable profits?
- Employed – what income is taxable?
- Armed forces and tax – pensions you receive
- Tax credits and benefits – state benefits
There is more information on the taxation of savings income in our other tax issues section.
There is more information on the taxation of property income in our other tax issues section.