A guide to paying the tax due on your State Pension

Published: 11/06/2024 By Mackenzie Street

No such thing as a free lunch
The State Pension has long been a cornerstone of retirement planning in the UK. Each year the ‘Triple Lock’ guarantee ensures our retirees’ income that at least keeps pace with inflation, and whilst this annual uplift is welcome news for pensioners, it also brings a less celebrated consequence: more retirees paying income tax. The Government seem to give with one hand and take away with the other.

Learn more about the ‘Triple Lock’.

A growing burden
While the ‘Triple Lock’ has undoubtedly benefitted pensioners, the increases in State Pension payments have nudged more individuals over the personal allowance threshold for income tax. The personal allowance has been frozen at £12,570 until the 2025/26 tax year, with relevant income above this amount subject to income tax.

With the full new State Pension paying £221.20 per week (around £11,500 per year), and many retirees also receiving additional income from private pensions, it is becoming increasingly common for pensioners to exceed the personal allowance. Consequently, they are now finding themselves liable for income tax, which often comes as an unexpected financial burden.

Paying the tax due on your State Pension
The State Pension is taxable. However, you receive your State Pension gross, with no deduction of tax. The way tax is paid depends on the kind of pension you get, and whether you have any other income.

State Pension and private pension
Your private pension provider will usually deduct any tax you owe before they pay you. They will also deduct any tax you owe on your State Pension.

If you receive pension payments from multiple providers, say one personal pension, one workplace pension, and one State Pension, then HMRC will ask one of your providers to deduct the tax due on your State Pension.

At the end of the year, you will get a P60 from your pension provider showing how much tax you have paid. You should note that you will not get a P60 for your State Pension.

State Pension is your only income
If your State Pension is your only income, and this is below your Personal Allowance, then you usually will not need to pay tax. If you exceed your Personal Allowance and you need to pay tax, HMRC will send you a Simple Assessment tax bill telling you how much you owe and how to pay it.

State Pension and continuing to work
If you continue to work whilst also receiving your State Pension, your employer will usually deduct any tax due on your State Pension from your earnings.

If you are self-employed, you must complete a Self Assessment tax return at the end of the tax year. You must declare your overall income, including State Pension, personal pension, and workplace pension.

Source: Tax when you get a pension: How your tax is paid

Planning for the future
For those approaching retirement, or already retired, understanding the tax implications of the State Pension increases is crucial. A financial adviser can help you navigate these complexities and assist in structuring your income in a tax-efficient manner.

Speak with an Independent Financial Adviser here.