Is the UK state pension taxable?

Your State Pension here in the UK could be liable for income tax, and you need to be aware that it is paid before any tax is deducted. This Moneyfarm blog has been written to help you understand not only the answer to the question ‘is the State Pension taxable?’, but what the thresholds are, how you can make use of tax-free allowances, what happens if you defer your pension and more.

UK state pension -the basics

If you qualify, you will be entitled to receive your State Pension from the UK government when you reach the State Pension age. However, not all people that are eligible will receive the same amount. It all depends on how much National Insurance you pay throughout your working life.

Your State Pension forms the basis of your retirement income, and in this blog, we delve further into the question of is UK State Pension taxable and, if so, how is State Pension taxed? You also need to be aware that, in addition to your State Pension, you can receive retirement income from other sources, including workplace, private pensions, and SIPPs.

What is the state pension age?

Current State Pension rules are based on men who have reached the State Pension age and were born on or before the 6^th of April 1951 and women who have reached the state pension age and were born on or after the 6^th of April 1953.

Payment is based on your National Insurance record. If you didn’t have a NI contributions record before the 5^th of April 2016, you must have recorded 35 years’ worth of contributions.

In order to receive any amount of State Pension, the current rules state you usually have to have recorded a minimum of 10 qualifying years’ worth of contributions.

To check out the date at which you are entitled to draw State Pension, refer to this Pension Age Timetable.

Remember that there is no longer a set, forced, or default retirement age, excepting specialised jobs that have a law-enforceable retirement age based on physical fitness, such as firemen or women.

If, before reading about State Pension taxes, you want to know more about the specifics of the pension, you’ll find a comprehensive breakdown on the Gov.UK website.

The tax threshold for state pension

Is tax payable on State Pension? – Yes, it could be. You may have to pay income tax on your State Pension based on your personal tax allowance, which for the current tax year (2022-2023) is £12,750.

If you are eligible for the full state pension, which is currently £9,627.80 per annum, you are in the band whose tax-free threshold is £12,750, and you have no other income, the answer to the question, is my State Pension taxable, is no. In fact, you would have £2,942.20 of your tax-free allowance left.

However, surviving your retirement on the State Pension alone is challenging. Most people now have other pension sources of income in place. The Workplace Pension is the most likely additional retirement type of income, or a private pension or SIPP.

Income from any of these is added to the income from your state pension and is likely to tip you over into either the basic or higher rate tax paying brackets, changing the answer to the question, is the State Pension taxable from no to yes.

Deferring your state pension

Deferring state pension is an option that some people take if they continue to be employed after reaching State Pension age – particularly when their pensions are insufficient to grant them the lifestyles they want to attain.

It’s important to understand that it is not necessary to defer your state pension. You only begin to receive it after you have applied. However, if you decide to defer it as one of your pension options, you can apply for it when ready.

If you do go down the deferment route, and assuming you defer it for 9 weeks at least, the postponed payments you will receive will be increased by 1% for each 9-week period – which works out to an increase of a little under 5.8% per annum.

The answer to the question ‘is state pension taxable income’ is yes; it will be if your accumulated taxable retirement income is more than your threshold allowance.

Other types of retirement income

We’ve already mentioned some other types of pension income (workplace pension, private and self-investment pensions), but you may have other sources of income too. For example, you might have stocks and shares, or bonds. If you do, you must pay income tax on the accumulated income, which must be declared on your annual assessment tax return.

Retirement income received from a stocks and shares ISA is tax-free. So, there is no tax due, and you don’t have to record it on a tax assessment. It is one of the reasons that these types of ISAs are such a popular choice when it comes to how to invest money.

Take full benefit of any tax-free allowances

You might be entitled to specific tax-free allowances. They include the blind person’s allowance, dividend, personal savings, and marriage allowance. You can read more about these from the “benefits and tax pages on the UK government website.

It’s worth bearing in mind that you can take a tax-free lump sum, up to 25% of your pension pot, from most non-state pensions once you reach the age of 55. This also applies to any smaller lump sums you might withdraw over a period of time, providing the totals do not exceed the 25% mark.

Concluding thoughts

As you may have gathered, the answer to ‘is tax paid on State Pension’ is quite complex. In a nutshell, the State Pension itself is not taxed, but it counts in calculating whether or not your total income has exceeded your personal tax allowance.

The workings of pensions and pensions tax can be challenging to understand, so you should consider speaking to a specialist financial adviser. They will be able to give you advice on things like pension transfer or self-employed pension options.

Ensure that the adviser to choose is an FCA-approved and regulated firm, and ensure that any schemes recommended to you are covered under the FSCS (Financial Services Compensation Scheme).

FAQ

When do I pay taxes on my UK State Pension?

When your total income, including any state pensions you may be entitled to, exceeds the current personal allowance threshold of £12,570, then you will have to start paying Income Tax. However, if your total income is just a full state pension of £9,627 per year, you are exempt from tax as it is below your personal allowance threshold.

Do I pay any tax on my deferred state pension?

You will be taxed on your total pension amount if you take out the extra state pension on your deferred pension. If you take out a lump sum instead of the extra state pension gotten from state pension deferral, it will be taxed based on your current rate.

Do I get my state pension automatically?

No, you must claim your state pension, payments are not automatic. Two months prior to reaching the state pension age, you should receive a letter from HMRC to guide you on claiming your state pension. You can either claim it or defer it. You don’t have to take any action if you choose to defer it, as it is automatically deferred until it is claimed.