Britons do not stop paying tax once they retire, as their pension pots will be assessed and have tax deducted when people decide to draw from them. The amount people pay depends on how much they have stashed away for retirement, with various forms of income, including the state pension, contributing towards the tax calculation.
Total income could include:
- The state pension (the basic state pension or the new state pension)
- Additional state pension
- A private pension (workplace or personal) – however, some of this can be taken tax-free
- Earnings from employment or self-employment
- Any taxable benefits
- Any other income, such as money from investments, property or savings
People may have to pay Income Tax at a higher rate if they take a large amount from a private pension. They may also owe extra tax at the end of the tax year.
Anyone who has private pensions with a total value of more than £1,073,100 must usually pay a tax charge. This is due to exceeding the Lifetime Allowance threshold, which limits the amount of money people can put into a pension during their life.
The charge will be assessed by people’s relevant pension provider before they receive their payment. This includes the state pension.
People should be aware that other rules apply to people inheriting a state pension or private pension.
What is tax-free?
Up to 25 percent of the value of people’s private pensions can be taken as a tax-free lump sum. This does not impact the Personal Allowance.
Tax is then taken off the remaining amount of people’s private pensions before they receive it.
As an example, someone with a pension pot of £50,000 could draw £12,500 tax-free, and would then be taxed on the remaining £37,500.
National Insurance and pensions
People over the state pension age of 65 do not usually pay National Insurance (NI), even if they are still in work.
Only those who pay Class 4 contributions will continue to pay until the end of the tax year in which they reach state pension age.
The recently announced Health and Social Care Levy, which will mean Britons paying an additional 1.25 percent in NI next year to support reforms to the care system in the UK, will include pensioners.
This means people working past state pension age will have to pay 1.25 percent from April 2023, while the 1.25 percent National Insurance rise will come into force in April 2022.