State pension UK: How is income tax levied on payments? Rules explained

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State pension payments are treated as earned income for income tax purposes. The amount of income tax that’ll be paid on these payments will depend on people’s gross income.

Gross income is defined as the total amount of income that is potentially liable to tax which is received from all sources, including earnings, profits from self-employment and other pension income.

Income tax will be levied on these forms of income once they go past the personal allowance.

For 2020/21, the standard personal allowance is £12,500.

Any income received over this amount will face income tax on varying rates.

These rates and bands are as follows:

  • Basic rate: £12,501 to £50,000 – 20 percent
  • Higher rate: £50,001 to £150,000 – 40 percent
  • Additional rate: over £150,000 – 45 percent

There is no personal allowance in place for people who receive taxable income over £125,000.

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State pension payments are treated as earned income but they are always paid to claimants “gross”, meaning no tax is deducted before it’s received.

If a person has other income on top of state pension payments, such as from employment or private pensions, HMRC will ask the person’s employer and/or pension provider to apply a lower tax code to compensate for the fact that tax has not been deducted from the state pension.

This should ensure the correct level of tax overall will be paid.

Employers and/or pension providers will go on to pay appropriate tax funds across to HMRC on the person’s behalf.

Similarly, if a person doesn’t work but get pensions from more than one provider, an example being workplace or personal pensions, HMRC will ask one of the providers to apply a lower tax code to compensate for the tax payable on the state pension.

Retirees should also remain aware of their tax obligations if they decide to defer their state pension.

If the eventual boosted payments from deferment push a person over the personal allowance, income tax will be due.

If state pensions are deferred for at least nine weeks, the payments will increase by the equivalent of one percent for every nine weeks of deferment.

This will work out at just under 5.8 percent for every 52 weeks.

Triple lock increases could also push people over their personal allowances and this will need to be kept an eye on for tax purposes.

Under triple lock rules, state pension payments are guaranteed to increase every year by whichever is the highest of the following:

  • earnings – the average percentage growth in wages (in Great Britain)
  • prices – the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI)
  • 2.5 percent

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