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Do I have to pay tax on my pension?
Your pension counts as taxable income, which means that if you receive more than a certain amount per year you will be due to pay income tax.
- If you are required to pay tax on your pension, it will usually be taken at the source through the PAYE scheme. Your pension payer will pay a percentage of the amount directly to HMRC. If tax is also due on your state pension, this will be removed from your other pension or annuity payments. In this case you will still receive the full state pension, but you will pay more tax on your other pension(s).
- If you think that your pension payments will take you over your personal allowance, you should register to complete a Self-Assessment tax return. It is important that you do this, because if you do not pay enough tax you may face a tax bill, possibly including penalties.
- If you think you have paid too much tax on your pension you can apply for a Tax refund.
Do I have to pay tax on my state pension?
When you reach state pension age, you no longer need to pay National Insurance, however, you still need to pay Income Tax. Every year, you receive a tax-free personal allowance, which may vary according to your age. If your total income, including your state pension, exceeds this personal allowance, then you need to pay Income Tax on the excess.
Before you reach state pension age, HMRC will contact you and ask you to complete a P161 form. This form provides details of all your pension income. It is important that you fill it in correctly or you might end up paying too much tax.