Retirement brings with it a lot of change: change to your routine, to your income and changes to the amount of tax you have to pay. Find out how your pensions are taxed and when interest on your savings might be paid tax free.
- Income Tax and National Insurance contributions
- Income Tax personal allowances
- How your pension is taxed
- Defined benefit pensions
- Defined contribution pensions
- Understanding your tax codes
- Tax-free interest on your savings
- National Insurance contributions
Income Tax and National Insurance contributions
You still have to pay Income Tax after you’ve retired.
This applies to all your pension income, including the State Pension.
Many people assume that their pension income – especially the State Pension - will be tax free, but that’s not the case.
Some income, including your State Pension, is paid without any tax being taken off.
But if tax is due, this will often be collected by taking money off any company pension payments or when you take money out of a workplace or personal pension.
Income Tax personal allowances
You are able to earn or receive up to £11,500 in 2017-18 tax year (April 6th to April 5th the next year) and not pay any tax.
This is called your Personal Allowance. If you earn or receive less than this then you’re a non-taxpayer.
How your pension is taxed
You can normally withdraw up to 25% of your pension pot tax free.
The remaining pot is used to provide an income or can also be withdrawn; in both cases this is taxable.
That means any money you receive over your Personal Allowance will be taxed.
Defined benefit pensions
If you have a defined benefit pension (also known as a final salary or career average pension) you can normally take up to 25% of your pension tax free, but you’ll be paid the rest as an income, which will be taxable.
Defined contribution pensions
From April 2015 you are able to take as much money out of your pension as you want.
However, usually only the first 25% will be tax free. The rest is taxable.
That means, the more money you take out, the higher your tax bill could be.
Understanding your tax codes
When you retire, if you receive an income from several different sources; for example:
- Earnings from a job, or
- More than one pension
You might be given more than one tax code.
Make sure you check the tax code(s) so you know the right amount of tax is deducted.
Tax-free interest on your savings
The Personal Savings allowance, introduced in April 2016, is the amount of savings income that can be received tax-free.
For 2017-18 this remains at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.
If you previously completed the R85 form to receive interest without the tax taken off, you’re no longer able to do this as the option to receive your interest tax-free is no longer available.
From April 2016, banks and building societies will no longer deduct basic rate tax from the interest on your savings.
Instead, if your savings income is over £1,000 for a basic rate taxpayer and £500 for a higher rate taxpayer, HMRC will collect any tax due through your PAYE code.
If you normally declare savings income through a self assessment tax return you should continue to do this.
You can still claim back tax you might have paid on your savings in previous years when you should not have done.
Use form R40 to do this.
Interest you receive from tax-efficient savings accounts, such as cash ISAs, is paid tax free whether or not you’re a taxpayer.
National Insurance contributions
If you continue working beyond the State Pension age, you no longer pay National Insurance contributions on your earnings.
This article is provided by the Money Advice Service.