A quick guide to paying tax on your pension

Making sure you’re paying the right amount of tax can feel challenging. If you receive a State Pension or other type of pension, you may still need to pay tax on it.

Without the pay-as-you-earn (PAYE) structure of the workplace, you may find it hard to know when and how to pay tax on your pension.

Here’s what you need to know about your pension to stay compliant and stop tax liabilities from growing.

When do you need to pay tax on your pension?

In addition to the State Pension, some people may also receive payments from a private pension. Those born before 1951 (for men) or 1953 (for women) may also qualify for Additional State Pension (also known as the State Second Pension or SERPS).

Following retirement, you might also receive income from investment savings, or casual self-employment.

If the total income from all these sources exceeds your Personal Allowance – currently set at £12,570 – income tax will be payable.

How you’ll pay tax on your pension

How you pay tax on your pension depends on where it comes from.

If you receive State and private pensions, your pension provider should deduct any tax that you owe at source – from both of your pensions. This is achieved by an adjustment to your coding notice.

In cases where you receive more than one private pension, HM Revenue & Customs (HMRC) will nominate just one provider to deduct tax.

If you claim your State Pension and are employed, your employer should deduct tax through PAYE on both your employment income and pension.

Self-Assessment for pensions

What if your pension situation is different? If you receive only the State Pension or have other income, such as from investments or property, you’ll be responsible for paying any tax yourself.

This usually means filling in a Self-Assessment form and returning it to HMRC.

You will then be told how much tax you owe, and it is your responsibility to pay it.

Is anything new?

There are reports that letters issued by HMRC have caused worry among those receiving a State Pension. Some taxpayers have been informed they are being removed from Self-Assessment, leaving them with no mechanism in place to pay their tax.

As well as causing confusion, this may leave many people receiving the State Pension in a difficult situation.

With no way for HMRC to collect tax at source, taxpayers may be worried that their unpaid tax could add up quickly.

There is also the concern that the Personal Allowance freeze will mean a real-world fall in income for many receiving pensions.

Seeking support with your pension

To protect yourself and your pension from unpaid taxes, we recommend seeking advice from an experienced accountancy firm.

Our knowledgeable team of experts is here to guide you through the regulations around paying tax on your pension.

For further advice, please contact us today.