Retirement has little effect on how you’re taxed, but it can seem complicated as you’re likely to have several sources of income.
You still have to pay tax on your income after you’re retired. But, just as before, you have a personal allowance each year – you can receive up to £12,570 in the 2021/22 tax year and not pay any tax. Once your income exceeds £12,570 – from pensions, savings, property or employment – you pay income tax. You can check the current income tax rates at GOV.UK.
You may also qualify for some other tax allowances. The Married Couples Allowance allows couples, where at least one person was born before 6 April 1935, to get a reduction in their tax bill of up to £912.50 (in the 2021/22 tax year). And, if you’re married or in a civil partnership and one of you hasn’t used up all your personal allowance for the year (because you’re on a low income), you may qualify for the Marriage Allowance. This lets you transfer up to £1,260 (in the 2021/22 tax year) of your unused personal allowance to your partner, providing you’re a basic-rate taxpayer.
Find out more about the Married Couples Allowance and Marriage Allowance at GOV.UK. You can also find helpful information about other tax allowances on the Low Incomes Tax Reform Group (LITRG) website.
National Insurance is a tax on earnings that helps you to build your entitlement to certain state benefits, like the State Pension and Maternity Allowance. But the good news is, if you continue working beyond State Pension age, you don’t have to pay National Insurance contributions. Visit GOV.UK for more information.
Your State Pension
Your State Pension counts as income for tax purposes, but it’s paid without any tax taken off. So when and how do you pay tax on it?
- If your total income, including your State Pension, is below your personal allowance you won’t pay any income tax.
- If your total income, including your State Pension, is above your personal allowance, you’ll pay some tax. If you have other income, from other pensions or earnings, HMRC tells your pension provider or employer to automatically deduct the tax you owe on this and your State Pension before paying you. If all your income comes from the State Pension, you should receive a letter from HMRC explaining what tax you owe and how to pay it. Find out more about this at GOV.UK.
If you have deferred your State Pension in exchange for a one-off lump sum, just remember that when you choose to take the lump sum can affect the amount of tax you pay on it. Find out more on the LITRG website.
Your other pensions
You can normally take out some money (up to 25%) from your pension tax free. The rest is taxable as income.
If you have a defined contribution pension, once you reach 55 you can choose how and when you take your money – there's more information about your pension pot options on the Pension Wise website. The decision you make can have a big effect on the amount of tax you pay. For example, you could choose to take out a lump sum but, by doing so, you may tip yourself into a higher tax bracket for the year, leading to an unwanted tax bill and less money in your pocket.
Things to watch out for
Multiple tax codes
If you have different sources of income, you’ll end up with several tax codes, which tell your employer or pension provider how much tax to deduct. Don’t assume these are correct – HMRC does make mistakes. You should receive coding notices with details of your tax codes before the start of the tax year. It’s a good idea to check these are right (more information on how to do this can be found on the LITRG website) and if you think there’s a mistake, or if you’re not sure, contact HMRC.
The first time you take a lump sum (apart from the tax-free lump sum) from a defined contribution pension, it’s likely you’ll be charged too much tax. This is because most initial lump sum payments are taxed using an emergency tax code. This means you’re taxed as if you made the same lump sum withdrawal every month of the tax year. You can claim back overpaid tax using the forms on GOV.UK.
Where to find help
- TaxAid: free tax advice for people on low incomes whose tax problems can’t be resolved with HMRC.
- Tax Help for Older People: independent and free tax advice if you’re over 60 and have an income less than £20,000.
- Money Advice Service: general guidance and information on income tax, allowances and National Insurance.