Making sure you’re paying the right amount of tax can be taxing! If you receive a State Pension or other type of pension, then 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 and tax liability – 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.
Following retirement, you might also receive income from investments savings, or casual self-employment.
If the total income from all of these sources exceeds your Personal Allowance – currently set at £12,570 – then you will have to pay tax, even if you claim the State Pension.
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, then your pension provider will deduct any tax that you owe at source – from both of your pensions.
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 in addition to employment, then your employer will deduct tax through PAYE on your income and pension.
Self-Assessment for pensions
What if your pension situation is different? If you receive only the State Pension or you have other income, such as from investments or property, then you’ll be responsible for paying 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 – typically through HMRC’s online system.
Is anything new?
Reports of letters from HMRC have caused worry among those receiving a State Pension. Taxpayers have been informed that they are being removed from Self-Assessment, leaving them with no mechanism in place to pay tax.
As well as causing confusion, this has left many people receiving State Pension in a sticky situation.
With no way for HMRC to collect tax at source, taxpayers may be worried that their unpaid balance could pile up quickly.
There is also the concern that, with the rising rates of pensions, 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 are here to guide you through the regulations around paying tax on your pension.
For further advice, please contact us today.