What is income?
In this section, we look at some of the most common types of income you might have as a pensioner.
In this section, we look at some of the most common types of income you might have as a pensioner. These include:
- state pension – this pension is taxable;
- 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 can be taxable if paid outside an ISA and it exceeds either the personal savings allowance or dividend allowance;
- pension credit – this is not taxable.
The tax system has many exceptions, so you should also look at the section What income is taxable? to check the tax position of different types of income.
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 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. HM Revenue & Customs (HMRC) does 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. However, unlike other kinds of income, 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.
To help avoid any problems with tax on your pensions, you should tell HMRC whenever you receive a new pension. Keep a note of the telephone call (date, time, to whom you spoke and what was said). You will need your National Insurance Number when you telephone and may be asked some security questions (personal details).
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 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 might have your state pension paid to you fortnightly or four-weekly, for example.
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 would also apply 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.
Christine is due her state pension from 9 March 2018 at £159.55 a week (the rate up to April 2018). 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 6 April 2018. Although Christine did not actually receive any state pension in the 2017/18 tax year (which ended on 5 April 2018), had she been paid weekly, she would have received payments on 16, 23 and 30 March. Her taxable state pension for 2017/18 is therefore 3 times the weekly amount she is due – 3 x £159.55 = £478.65.
What happens in the year I start to receive my state pension?
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 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 guide.
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. We suggest you also look at the section 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.
Look at the example Donald to see how you pay tax when you receive the state pension and an occupational pension.
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.
Note that retirement annuities are different to ‘purchased life annuities’. Purchased life annuities are bought, with money that is not necessarily directed to the purchase of an annuity – that means you buy an annuity with money you have saved up outside of pension schemes. Purchased life annuities are treated for tax purposes as savings income. Part of the annuity is treated as the return of your capital, which tax-free, and the other part 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. In the UK, until 6 April 2017, you used to be taxed on only 90% of the foreign pension sums paid to you. For tax year 2017/18 onwards, you have to pay tax on 100% of the foreign pension income you receive. For tax years up to and including 2016/17, do check that you obtained the reduction if you have a pension being paid from overseas. You usually have to complete a Self Assessment tax return to report foreign pensions and to claim the deduction.
Look at the example Pierre to see how you pay tax on a foreign pension.
Which state benefits can I claim and how are they taxed?
Most, but not all, state benefits for pensioners apart from the state retirement pension are tax free. Benefits are usually paid because you have a low income or for health reasons. We suggest you look at the section on state benefits to check whether or not the benefits you receive are taxable.
It is worth checking that you are not including any tax-free items in figures that you supply to HMRC. Sometimes pension statements show both taxable and tax-free components.
How am I taxed on savings income?
Normally we say that 'earned income' includes pensions, income from your job and profits from self-employment. The rates of tax that normally apply to earned income are 20%, 40% and 45%.
If you live in Scotland, and are a Scottish taxpayer, you pay tax on your earned income according to the rates and bands set by the Scottish Parliament. There is more information in the tax basics section. You pay tax on your savings income according to the rates and bands set by the UK Parliament.
Income from savings is taxed differently from earned income. Income from savings includes interest from banks, building societies and interest on UK government investments. During 2018/19 (and in each tax year since 2016/17), a personal savings allowance is available which means that you can have some savings income without paying any tax at all. For basic rate taxpayers, the allowance is £1,000; for higher rate taxpayers, it is £500.
The rates of tax that normally apply to savings income are the 0% starting rate for savings, the basic rate of 20% and in some cases, the higher rate of 40% and the additional rate of 45%.
Bank and building society interest
Banks and building societies do not take tax off before they pay you your interest. This is because many people’s savings income is within the personal savings allowance and, if so, no tax is due.
If you have a lot of savings generating interest, you will need to keep track of the total interest you are receiving across all of your accounts. You may need to pay some tax if that total goes over the personal savings allowance.
If you have more tax to pay, HMRC will either collect it through your PAYE code, send you a tax calculation or a Simple Assessment showing what they think you owe and asking you to pay it, or send you a tax return to complete. We suggest you look at the savings and tax section for more information.
Look at the example Betty to see how you might pay tax on untaxed interest if you receive an occupational pension. She should be especially careful to check her tax position now that there is the personal savings allowance.
You might also think of company dividends as income from savings or investments, but these are taxed at different rates.
If you receive company dividends, or unit trust and open-ended investment company distributions, these are paid to you with no tax taken off. A dividend allowance is available, meaning that there is no tax due on the first £2,000 of dividends received in the 2018/19 tax year (£5,000 in 2016/17 and 2017/18). No tax is due on the income unless your total dividend income is over £2,000 in 2018/19.
You can find more information on dividends in the savings and tax section.
Purchased life annuities and investment bonds
If you want information on the tax treatment of purchased life annuities or investment bonds, we suggest that you look at the page What tax do I pay on savings income?.
Donald – state pension and occupational pension
Donald, born in 1943 and single, receives only a company pension of £8,000 a year and state pension. His state pension for 2018/19 is £7,831.
We work out what allowances can be set against Donald's company pension like this:
|Allowances for 2018/19||£11,850|
|Less: state pension||£7,831|
|Allowances to go against company pension||£4,019|
Pierre is French. He was born in 1944 and lives in the UK with his English wife. He has pensions from French companies and the state of France amounting to the equivalent of £20,000 each year.
In the UK, in 2016/17 he was only taxed on £18,000, after applying the 10% deduction for foreign pensions.
In 2017/18 and 2018/19, however, he is taxed on £20,000 – the full amount of the foreign pension.
Betty pays tax at 20% – for 2018/19 her income before allowances is £19,000, including an occupational pension of £11,000 and state pension of £6,000. She receives interest from National Savings Income Bonds of £2,000. This amount is paid with no tax taken off.
After deducting the personal savings allowance of £1,000, Betty has to pay tax on £1,000 of her savings income. This is collected through the coding notice for her occupational pension. Betty will need to check that the coding notice from HMRC shows £1,000 savings income. She will normally receive this in February or March before the tax year starts. If no coding notice is received, she should contact HMRC, either online via her personal tax account, or by telephone to check the code in place and request a notice.
Where can I find more information?
For more information on whether or not different types of income are taxable, look at the sections:
The Government provides information on paying tax on your pension on the GOV.UK website.