How do I work out my tax?

Updated on 14 July 2019

Pensioners

If you are a pensioner, you might have a few different sources of income. In particular, you may have a state pension, but also a private or an occupational pension. You need to be able to work out your tax, so that you can check you are paying the correct amount of tax.

How do I work out my tax?

The tax year runs from 6 April one year to 5 April the next.

Working out your tax position is basically a four stage process, which we set out in the tax basics section. In stages one and two, you have to work out your taxable income and any allowances or deductions you are entitled to. In this section of our website we provide information on:

that relate to pensioners.

You also need to be able to check your coding notice.

You will also have to pay tax on any other taxable income that you have in the tax year.

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Example calculations

For most pensioners with simple tax affairs the way the tax calculation works is as set out below.

Total taxable income – most income is taxable although some sources may be tax free xxxx
Take off certain tax allowances  (xxxx)
Take off the blind person's allowance if you are entitled to it (xxxx)
You are left with the amount of your taxable income on which you actually have to pay tax xxxx
Calculate your tax liability using the tax rates that apply to you xxxx
Take off the amounts you get due to any special allowances like married couple's allowance or marriage allowance (xxxx)
Take off any tax already deducted from the income you receive before you get it (xxxx)
Tax now due or (repayable) xxxx or
  (xxxx)

 

Two examples, Amy and Will, follow. We assume both Amy and Will live in either England, Wales or Northern Ireland. If you live in Scotland and are a Scottish taxpayer, look at the tax basics section. Note that in 2019/20, a Welsh income tax applies, but the way that it works means that Welsh taxpayers will pay the same amount as someone in England or Northern Ireland.

Amy – occupational pensions, state pension and savings income

Amy was born in 1933 and is widowed. She is registered blind. For 2019/20 she has the following income – you can see how the starting rate for savings of 0%, personal savings allowance (also called 'savings nil rate') and dividend tax allowance (also called 'dividend nil rate') can affect your tax bill:

  Income before tax Tax taken off
  £ £
Occupational pension from BT 7,800 0
Occupational pension from local council 4,360 760
State pension 6,591  
National Savings Income Bonds – interest 2,000  
Bank interest 500  
Dividends 1,800  
  23,051 760
Working out Amy's tax £
Amy's income before tax comes to 23,051
Less her allowances:  
Tax free personal allowance 12,500
Blind person's allowance (as Amy is registered blind) 2,450
Amy's taxable income on which she actually has to pay tax 8,101
Total on pensions: Amy pays her highest rate of tax on the pensions, so we take her allowances from her pensions first so that she pays as little tax as possible  
Total pension income (£7,800 + £4,360 + £6,591) 18,751
Allowances to come off (£12,500 + £2,450) 14,950
  3,801
Tax on £3,801 is:  
£3,801 @ 20% 760
Tax on Income Bonds: Amy still has part of her starting rate for savings unused, so part of her interest is taxed at 0%. The starting rate for savings limit for 2019/20 is £5,000, which when added to Amy’s allowances of £14,950 makes £19,950; take away Amy’s pension income of £18,751 and we are left with £1,199 to set against her savings income of £2,500. The savings nil rate (personal savings allowance) also applies, meaning another £1,000 of her savings income is taxed, but at 0% – meaning no tax is due. The rest is taxed at 20%.  
£1,199 @ 0% starting rate for savings 0
£801 @ 0% savings nil rate (personal savings allowance) 0
Tax on bank interest:  

£199 @ 0% savings nil rate (personal savings allowance (£1,000 - £801))

0
£301 @ 20% 60
Tax on dividends: Dividends up to £2,000 are within Amy’s dividend tax allowance, meaning they are taxed at 0%, so this means no tax is payable on them  
£1,800 @ 0% 0
Total tax liability before special allowances 820
Less: Special allowances: Amy has no special allowances, for example, married couple’s allowance 0
Less: Tax already taken off (see above): This is the tax taken off Amy's income before she receives it, so we need to take this off her tax bill (760)
Amy's tax underpayment £60


Amy has a tax underpayment of £60. This is tax on her savings income and it arises because her savings income was not included in her PAYE tax code.

Will – Personal pension and purchased annuity

Will was born in 1934 and is married to Annie. Will's income for 2019/20 is as follows:

  Income before tax Tax taken off
  £ £
Personal pension, from when Will was self-employed 9,150 358
State pension 9,600  
Building society interest 300  
National Savings Income Bonds – interest 1,500  
Purchased annuity – income element 2,000 400
  22,550 758
Working out Will's tax  
  £
Will's income before tax comes to 22,550
Less his allowances: (12,500)
Will's taxable income on which he actually has to pay tax 10,050
Tax on pensions: This is the income on which Will pays his highest rate of tax, so we take off his allowances from pensions first so that he pays as little tax as possible.  
Total pension income (£9,150 + £9,600) 18,750
Allowance to come off (12,500)
  6,250
Tax on £6,250 is:  
£6,250 @ 20% 1,250
Tax on Income Bonds  
£1,000 @ 0% savings nil rate (personal savings allowance) 0
£500 @ 20% 100
Tax on building society interest  
£300 @ 20% 60
Tax on purchased annuity income  
£2,000 @ 20% 400
  1,810
Less: Special allowances: Will gets married couple's allowance of £8,915, so he can get £891.50 – £8,915 multiplied by 10% – taken off his tax bill. Will gets the full allowance as his income is not high enough to trigger any restriction. (892)
  918
Less: Tax already taken off (see above) (758)
Will's tax due: As bank and building society interest does not have tax deducted from it before he gets it, Will could owe tax for 2019/20 if his PAYE code is not adjusted to collect the tax on it. Will should check his coding notice from HMRC and contact them if he thinks it is incorrect. £160


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Where can I find more help and information?

HMRC have a tax checker calculator for previous tax years, which you may be able to use if your tax affairs are simple. You can find the calculator and information about who can use it via GOV.UK.

HMRC have a tax estimate calculator for the current tax year, which you may be able to use if your tax affairs are simple. You can find the calculator and information about who can use it via GOV.UK.

If the tax checker and tax estimate calculators are not appropriate for your circumstances, and you have a low income, you may be able to seek assistance from the charity Tax Help for Older People.

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