Types of income in retirement
We look at some of the most common types of income you might have as a pensioner.
Common types of income you might have as a pensioner
Some typical types of income you might have are:
- state pension – this pension is taxable, even though it is paid without deduction of tax at source;
- occupational pensions paid by a previous employer or pension company – these pensions are almost always taxable;
- personal pensions paid from private pension savings, either from a scheme through your employer or one you have set up yourself – these pensions are almost always taxable;
- investment income such as interest from bank or building society deposits, or dividends – this is taxable if paid outside an ISA, but might be taxed at a nil rate which means that you may not have to pay any tax on it;
- pension credit – this is not taxable.
The tax system has many exceptions, so you should also look at What income is taxable?.
Is my state pension taxable?
Yes, your state pension is taxable.
However, you receive your state pension gross, with no tax taken off. If your income, including your state pension, is less than your tax allowances, you probably do not need to pay any tax at all. But if your income, including your state pension and any other pensions, is more than your tax allowances you may need to pay some tax.
⚠️ Note: you do not get a form P60 after the end of each tax year for your state pension, so you must keep your own records of your state pension income.
If you also receive a company pension, often called an occupational pension, or a regular income from another private pension scheme, the tax due on your state pension is likely to be collected from your other pension if it is large enough. This is done under the Pay As You Earn (PAYE) system. This may make the tax seem high on your other pension, but this is because HM Revenue & Customs (HMRC) collect tax on two pensions from the one source of income.
Please check the figure of state pension shown on the coding notice that is applied to your other pension. HMRC do not always know the exact amount you are due in the tax year. This can be a particular problem in the year you start to receive your state pension, especially if you have previously put off (or deferred) claiming it.
The state pension is taxed on an accruals basis. This means that the amount which is taxable might not be exactly the same as the amount received. See below for more information.
If you are thinking of retiring abroad, read our information on how your state pension will be taxed and about increases in state pension when you are living abroad.
Always keep any paperwork you are sent which tells you what your weekly amount of state pension will be for any tax year, as you will find this useful if you need to check your PAYE coding notice, complete a tax return, check a tax calculation sent to you by HMRC or make a repayment claim.
What amount of state pension is taxable?
The amount of state pension you pay tax on in a year is the amount that you are due to receive in the year.
This is often not the same as the amount you actually receive, as you are likely to have your state pension paid to you four-weekly.
You might need to do some sums to get to the right taxable amount, as you do not get a P60 for the state pension after the end of the tax year. To do this, you should refer to letters you receive (usually before the start of the tax year) telling you how much your weekly amount of state pension is. You will then have to count how many weekly payments you would have received in the tax year if you had it paid weekly and multiply this by the weekly sum. Sometimes, depending on how the dates fall, you might have to add, say, 51 weeks at one amount to 1 week at a different amount to make up the full year.
If you only started to receive the state pension part way through a year, you will need to count the weeks from the date you were due to start receiving it. This reverse would be true if you are dealing with the affairs of someone who died during the tax year – you would need to count the weeks from the start of the tax year in which they died up to the date of death.
If you have another source of income which is taxed under PAYE, such as an occupational pension, then you might find the taxable figure for your state pension in your tax code for that source of income. Alternatively, you can contact HMRC to ask them the correct figure to report on your tax return.
Note that the winter fuel payment and Christmas bonus, also paid by the Department for Work and Pensions, are both tax free. Be careful not to include these amounts in your tax return, if you complete one.
Christine was due her state pension from 15 March 2023 at £185.15 a week (the rate up to April 2023). The default payment is 4-weekly in arrears (which means that the first payment will be due at the end of the first four weeks after she first became due to receive it). The first payment she receives is therefore on 12 April 2023. Although Christine did not actually receive any state pension in the 2022/23 tax year (which ended on 5 April 2023), had she been paid weekly, she would have received payments on 22, 29 March and 5 April. Her taxable state pension for 2022/23 is therefore three times the weekly amount she is due – 3 x £185.15 = £555.45.
How is my state pension taxed in the year I start to claim it?
The state pension can be shown on your PAYE coding notice for another source of income in one of two ways:
- Your PAYE coding notice will show the amount of state pension that you will receive in the current tax year. HMRC will then tell your pension provider to use the code on a 'cumulative' basis; or
- Your PAYE coding notice will show the amount of state pension that you would receive if you were due to receive it for the full year. HMRC will then tell your pension provider to use the code on a ‘month 1’ or ‘week 1’ basis.
We explain more under How do I check my coding notices?.
You should always check you understand and agree with PAYE coding notices and any tax calculations or simple assessments that HMRC send to you.
If you do not receive any income that uses a PAYE code, any tax due on your state pension will be collected through your self assessment tax return, if you are required to complete one, or through a simple assessment.
What tax do I pay on arrears (back-payments) of state pension?
The Department for Work and Pensions (DWP) is reviewing some people’s state pensions after finding out that their systems were wrong. The errors mean that the DWP have paid some people less state pension than they should have – so you may be owed a back-payment.
If you receive a back-payment, you need to know how it affects your tax.
We understand that the DWP will share information about the payments with HMRC to help you resolve any tax issues. Our information below will help you understand what should happen.
The state pension is taxable income but, unlike income from private pensions or employment income, no tax is taken off before it is paid to you.
Back-payments of state pension that relate to an earlier tax year are taxable in the year you should have received them, not in the year they are actually paid.
You will only need to pay tax on the back-payments if your total income was more than your personal allowance for the relevant tax year. HMRC will only seek to collect income tax any part of the back-payment relating to the current tax year and the previous four tax years. This means that for any back-payments received in 2023/24, HMRC will not collect tax on payments that relate to tax years before 2019/20.
We understand that the DWP will tell HMRC when a back-payment has been made. HMRC will then contact you if they think you owe some tax.
We also understand that HMRC will allow you to set up a Time to Pay arrangement if need be, rather than pay any tax all at once.
Ellie lives in England. She receives a letter from the DWP in October 2023 saying that they have not paid her enough state pension. They are sending her a lump sum of £1,440. Ellie has other taxable pension income. The sum and Ellie’s tax position is broken down as follows:
Amount of state pension back-payment £
|Other income||Personal allowance (PA)||
Spare personal allowance (PA minus other income)
|Taxable back-payment (back-payment minus spare PA)||Tax due on back-payment at basic rate 20%|
|2017/18||100||11,600||11,500||None – other income more than PA||0 (more than 4 years ago)||0 (more than 4 years ago)|
|2018/19||200||11,800||11,800||None – other income more than PA||0 (more than 4 years ago)||0 (more than 4 years ago)|
|2019/20||220||12,600||12,500||None – other income more than PA||220||44|
|2020/21||240||12,200||12,500||300||None – spare personal allowance is more than back-payment)||0|
|2022/23||280||12,600||12,570||None – other income more than PA||280||56|
|2023/24||140||12,800||12,570||None – other income more than PA||140||28|
|Total back payment||£1,440||Total tax||
What happens where the pensioner died before the back-payment is made?
We understand in cases where the pensioner has unfortunately died prior to the back-payment being made, that the payment will go to the individual’s personal representatives or next of kin.
HMRC have told us that the tax position will vary depending on whether or not the pensioner receives a notification from the DWP that a back-payment is due before they died:
If both the notification of the back-payment and the payment itself are received after death, then HMRC will not collect income tax on the back payment. The payment will not be included as part of the deceased’s estate for inheritance tax purposes.
If the pensioner has been notified by the DWP that a back-payment will be made, but the payment is not actually received until after they have passed away, income tax will still be collected by HMRC (payable by the personal representatives). The payment will form part of the deceased’s estate for inheritance tax purposes.
How do I pay tax on my occupational pensions, personal pensions and retirement annuities?
If you were in your employer's pension scheme, you may get an occupational pension. If you paid amounts into a personal pension plan, you may receive a private pension. If you set up a pension plan before July 1988, this will be called a retirement annuity policy, and you will be receiving a retirement annuity. All of these are called pensions.
You might also be able to take lump sums or irregular amounts from a pension, rather than a regular pension income. Whichever pension choices you make, you need to watch out for how you will be taxed – so please read our separate guidance.
Your occupational pensions, personal pensions and retirement annuities are taxed before you get them, under PAYE. HMRC tell your pension payer how much your tax allowance is and how much tax to take off your pension before paying it to you. They send you a coding notice, also known as form P2.
You 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.
The main problem on retirement is that your PAYE tax codes can get confusing. HMRC might get them wrong initially when you start to draw a pension, either from the state or privately, and you might even be continuing to work, so you have several sources of income. HMRC make assumptions about your retirement income to work out your PAYE codes, so you need to check them carefully. See also Tax code problems on retirement.
If you are receiving a state pension, HMRC normally try to collect the tax due on this at the same time as the tax due on the occupational or personal pension.
Example: Donald – state pension and occupational pension
Donald receives a company pension of £9,000 a year and state pension. His state pension for 2023/24 is £9,500.
We work out what allowances can be set against Donald's company pension like this:
Allowances for 2023/24
Less: state pension
Allowances to go against company pension
This means that of the £9,000 company pension he receives, Donald will pay tax on £5,930 (£9,000 - £3,070).
What tax do I pay on arrears of personal or occupational pensions?
Unlike the state pension, payments from a personal or occupational pension usually have tax deducted under PAYE before being paid to you.
If a private pension company realises you have not been paid enough pension for previous years and makes a back-payment to you, they will normally deduct tax from that payment in the tax year it is paid. If the back-payment is sizeable, this could push you into a higher tax band and may mean that you are paying more income tax than if you had received the correct level of pension in the tax years that the payments relate to.
In this case, HMRC say you can ask them to spread the payment back to the relevant tax years and recalculate your tax position.
The recalculation will work in a similar way to the calculation of state pension arrears shown above. However, there is no 4 year ‘look back’ limit. HMRC’s guidance says they will recalculate the position for all tax years that the payment relates to.
If you receive a payment of arrears from a personal or occupational pension and would like HMRC to spread the payment back and recalculate your tax position, you will need to contact them to request this – the process is not automatic. Your pension provider should be able to provide you with a statement setting out the tax years to which the back-payment relates.
If the pension provider pays you interest as compensation for the pension error, then this would be taxable in the year of payment and could not be spread back. Check any letter you receive from your pension provider to make sure you are clear what part of the payment is back-payment of pension, and what part is interest.
What paperwork should I receive relating to my pensions?
For regular pensions, after the end of the tax year, your pension payer should give you 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 or you get a tax calculation from HMRC showing you have paid too much tax or too little tax. You will not receive a similar statement from HMRC or Department for Work and Pensions (DWP) for the state pension, so you will need to keep your own records of the sums due and paid to you.
For lump sums taken under pension flexibility rules, you might receive different paperwork, such as a P45 if you have taken out all of your pension funds. See our separate guide What is the tax position when I take money from my pension flexibly?
Note that retirement annuities are different to purchased life annuities, the income element of which is taxed as savings income.
If you are thinking of retiring abroad, you should read our separate guidance on how you will be taxed.
You might have worked abroad and saved up in an overseas pension scheme or be receiving a foreign state pension. You should read our separate page on how foreign pensions are taxed.
Which state benefits can I claim and how are they taxed?
We recommend that you consult a welfare rights adviser for help understanding what benefits you can claim – for example, if you are on a low income or are in poor health.
Look at our state benefits page to check whether or not the benefits you receive are taxable.
How am I taxed on savings income?
See our separate page on how savings and dividend income is taxed.
Where can I find more information?
See our page What income is taxable?
Government information on paying tax on your pension can be found on GOV.UK.