What is income?
On this page, we look at some of the most common types of income you might have as a pensioner.
Summary of pensions and whether they are taxable
Some of the most common types of income you might have as a pensioner are:
- 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 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.
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 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 fortnightly or 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.
Christine is due her state pension from 9 March 2019 at £164.35 a week (the rate up to April 2019). 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 2019. Although Christine did not actually receive any state pension in the 2018/19 tax year (which ended on 5 April 2019), had she been paid weekly, she would have received payments on 16, 23 and 30 March. Her taxable state pension for 2018/19 is therefore three times the weekly amount she is due – 3 x £164.35 = £493.05.
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 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 our Tax code problems on retirement page.
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 2019/20 is £8,500.
We work out what allowances can be set against Donald's company pension like this:
|Allowances for 2019/20||12,500|
|Less: state pension||-8,500|
|Allowances to go against company pension||4,000|
This means that of the £9,000 company pension he receives, Donald will pay tax on £5,000 (£9,000 - £4,000).
What paperwork should I receive relating to my 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.
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?
Many, 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 our state benefits page 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?
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.