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Thursday, 3 September 2009

Do you have to pay tax in retirement?

When you reach State Pension age you no longer pay National Insurance contributions, but you don't automatically stop paying Income Tax. If your taxable income – including your pension – is more than your tax-free allowances you're still a taxpayer.

How do I know if I should be paying tax?

HM Revenue & Customs (HMRC) may have already contacted you to help you work out if you should be paying tax at State Pension age. You may have received a 'Pension Coding form' (P161). It's important that you fill this in for HMRC's information so that you pay the right tax and get your age-related allowances. If you're within a month of reaching State Pension age and haven't heard from HMRC download the form or contact them to ask for the form.

Working out if you should be paying tax - a quick guide

To work out if you are a taxpayer follow these three steps:

  • add up all your taxable income
  • work out your tax-free allowances
  • take your tax-free allowances away from your taxable income

If your taxable income is more than your tax-free allowances, you're a taxpayer and must contact HMRC. If your tax-free allowances are the same as or more than your taxable income, no action is necessary. If you think that you shouldn't be paying tax but are, you'll be able to claim a refund.

Step one - add up your taxable income

Some income is taxable and some is never taxed. You compare only your taxable income with your tax-free allowances in a tax year (6 April to 5 April) to see if you are a taxpayer.

The most common forms of taxable and non-taxable income are detailed below. However, please also refer to the full list of taxable and non-taxable income by following the link at the end of this section.

Taxable income

Your taxable income includes:

  • all pension income (including State Pension)
  • employment/self-employment income if you keep working
  • almost all bank and building society interest (the 'gross' amount, before tax is taken off)
  • dividends (income from shares)
  • income from property after expenses but not the first £4,250 if you rent out a room in your house
  • income from abroad (overseas pensions have a 10 percent deduction so you are only taxed on 90 per cent of the total amount)
  • some benefits, including Carer's Allowance and, in some cases, Incapacity Benefit

If you are married or in a civil partnership and have income from savings, investments or property held in joint names you're usually treated as getting half the income each. So you only have to pay tax on your half. If you're not married or in a civil partnership, you count only your share of joint income.

If you're not married or in a civil partnership you count only your share of joint income.

Non-taxable income

Income that's never taxed includes:

  • Pension Credit
  • Working Tax Credit or Child Tax Credit
  • income or interest from an Individual Savings Account (ISA), a Personal Equity Plan (PEP), or a Tax Exempt Special Savings Account (TESSA)
  • interest from National Savings Certificates 
  • interest and bonuses from a Save As You Earn (SAYE) scheme
  • Premium Bond and National Lottery winnings
  • certain benefits, including Cold Weather Payments, Attendance Allowance, Income Support and Disability Living Allowance
  • lump sum pension payments

Step two – add up your tax-free allowances

Your tax-free allowances are the amount of income you can get without paying tax. They include the Personal Allowance and the Blind Person's Allowance. 

Personal Allowance

Everybody gets the basic Personal Allowance, but if you're 65 or over and your income is below certain levels the rate increases.

Personal Allowance rates 2009-2010 Income limit (see note)
Basic amount for someone under 65 £6,475 none
Age 65 to 74 £9,490 £22,900
Age 75 or over £9,640 £22,900

Note: If your taxable income is over the 'income limit', the age related allowance reduces by half of the amount (£1 for every £2) you have over that limit, until the basic rate allowance is reached (You'll always get the basic allowance, whatever the level of your income.)

So if, for example, you're 66 and have an income of £23,400 (£500 over the limit) your age-related allowance of £9,490 would reduce by £250 to £9,240.

If you're 66 and have an income of £31,900 (£9,000 over the limit) your age-related allowance of £9,490 will reduce by £4,500 (i.e. £9,000/2) to become £4,990. However, you can't get less than the basic allowance so you will get £6,475.

Blind Person's Allowance

If you are certified blind and are on a local register of blind persons, or if you live in Scotland or Northern Ireland and you are unable to perform any work for which eyesight is essential you can claim Blind Person's Allowance. Like your Personal Allowance, this is an amount of income you can get without paying tax. For 2008-2009 the allowance is £1,800.

Step three – work out if you're a taxpayer

Take your tax-free allowances away from your taxable income - if there's anything left you count as a taxpayer and you must contact your Tax Office if you're not already paying tax. If there's nothing left you shouldn't be paying tax and may be due a refund

Bear in mind that you may qualify for other allowances such as Married Couple's Allowance and Maintenance Payments Relief that can reduce your tax bill, or in some cases mean you have nothing to pay at all – follow the link below to find out more.

If you get a personal (including retirement annuity) or company pension or do part-time work and as a result pay tax through the PAYE (Pay As You Earn) tax code system, your Tax Office may be able to collect any extra tax you owe that way (including on your State Pension). Otherwise they'll ask you to complete a Tax Review form P810 to report your income or pay tax through Self Assessment.

How to contact your Tax Office

You'll usually find a phone number and address for your Tax Office in any letters or forms you've received from HMRC. Or, if you know the name of your Tax Office, you can search for the contact details online. You can also ask at a local HMRC Enquiry Centre.

If you think you're paying too much tax

If you think you're paying too much tax or shouldn't be paying tax at all, there are steps you can take to claim a refund.

Additional links

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