⚠️ Please note: we are currently working on updating our tax guidance for 2020/21
across the LITRG website
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 the total income that you have to pay tax on (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.
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. See: How is tax collected from my occupational and private pensions?
Foreign pensions and lump sums paid under overseas pension schemes.
- 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 – 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. It is fully taxable.
- State pension lump sums, arising as a result of deferral.
- Purchased life annuities – income element.
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 GOV.UK. 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.
- 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.
- Certain pension commencement lump sums from UK approved pension schemes usually 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.
Where can I get information on whether other types of income are taxable?
For more information on various 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?
- Employment – what income is taxable?
- Tax credits and benefits – state benefits