Do you have to pay tax in retirement? :Cross Stitch – Pensions and retirement planning
When you reach State Pension age you no longer pay National Insurance contributions, but you don’t automatically stop paying Income Tax. If your taxable income – including your State Pension – is more than your tax-free allowances you’ll still have to pay tax.
To work out if you are a taxpayer follow these three steps (these are covered in more detail below):
- add up all your taxable income
- work out your tax-free allowances
- take your tax-free allowances away from your taxable income
If your taxable income is more than your tax-free allowances, you’ll have to pay tax and must contact HMRC. If your tax-free allowances are the same as or more than your taxable income, no action is necessary. If you think that you shouldn’t be paying tax but are, you’ll be able to claim a refund.
Some income is taxable and some is non-taxable. You compare only your taxable income with your tax-free allowances in a tax year (6 April to 5 April) to see if you’re a taxpayer.
We’ve included the most common types of taxable and non-taxable income below. However, please also refer to the full list of taxable and non-taxable income by following the link at the end of this section.
Your taxable income includes:
- all pension income (including State Pension)
- employment/self-employment income if you keep working
- almost all bank and building society interest (the ‘gross’ amount before tax is taken off)
- dividends (income from shares)
- income from property after expenses – but not the first £4,250 if you rent out a furnished room in your house
- income from abroad (overseas pensions have a 10 percent deduction so you are only taxed on 90 per cent of the total amount)
- some benefits, including Carer’s Allowance, Employment and Support Allowance and Incapacity Benefit
If you’re married or in a civil partnership and have income from savings, investments or property held in joint names you’re usually treated as getting half the income each. This means you may only have to pay tax on your half of the joint income. If you’re not married or you’re not in a civil partnership count only your share of joint income.
If you’re not married or you’re not in a civil partnership count only your share of joint income.
Non-taxable income includes:
- Pension Credit
- Working Tax Credit and Child Tax Credit
- income or interest from an Individual Savings Account (ISA), a Personal Equity Plan (PEP), or a Tax Exempt Special Savings Account (TESSA)
- interest from National Savings Certificates
- interest and bonuses from a Save As You Earn (SAYE) scheme
- Premium Bond and National Lottery winnings
- certain benefits, including Cold Weather Payments, Attendance Allowance, Income Support and Disability Living Allowance
- lump sum pension payments (but not lump sums from deferring a State Pension or foreign pensions)
Your tax-free allowances are the amount of income you can get without paying tax. They include the Personal Allowance and the Blind Person’s Allowance.
Everybody gets the basic Personal Allowance and if you’re 65 or older and your taxable income is below certain levels the rate increases.
Personal Allowance rates 2012-13
| Basic amount for someone under 65 | £8,105 | £100,000 |
| Age 65 to 74 | £10,500 | £25,400 |
| Age 75 or over | £10,660 | £25,400 |
The age-related allowances are reduced by half the amount (£1 for every £2) your taxable income is over your income limit. Basic Personal Allowance reduces where the income is above £100,000 by £1 for every £2 of income above the £100,000 limit. This reduction applies irrespective of age.
So if, for example, you’re 66 and have a taxable income of £25,900 (£500 over the limit) your age-related allowance of £10,500 would reduce by £250 (£500 ÷ 2) to £10,250.
If you’re 66 and have an income of £35,400 (£10,000 over the limit) your age-related allowance of £10,500 will reduce by £5,000 (ie £10,000 ÷ 2) to become £5,500. However, you can’t get less than the basic allowance unless your income is more than £100,000 so you’ll get £8,105.
If you’re 66 and have taxable income of £110,000 (£10,000 over the basic limit) your basic allowance will be reduced by £5,000 (ie £10,000 ÷ 2) to become £3,105.
Take your tax-free allowances away from your taxable income. If there’s anything left you count as a taxpayer and you must contact HMRC if you’re not already paying tax. If there’s nothing left you shouldn’t be paying tax and may be due a refund.
Remember that you may qualify for other allowances such as Married Couple’s Allowance and Maintenance Payments Relief that can reduce your tax bill. In some cases this may mean that you have nothing to pay at all. Follow the link below for ‘Introduction to tax allowances and reliefs if you pay tax’ to find out more.
If you already pay tax through PAYE, HMRC may be able to collect any extra tax you owe including that on your State Pension through PAYE if any of the following apply:
- you’re getting a personal (including retirement annuity) or company pension
- you work part time
Otherwise they’ll ask you to complete a Tax Review form P810 to report your income or to pay your tax through Self Assessment.