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Wednesday, 3 October 2012

Tax if you're self-employed and getting a pension

Reaching State Pension age doesn't automatically mean retirement from work. If you're self-employed you may decide to continue working and claim your State Pension. You may also receive a company or personal pension or both. How you'll pay tax will depend on your circumstances.

If you're self-employed and your only pension is the State Pension

 If you're self-employed, you'll probably already be completing a Self Assessment tax return each year to:

  • report your overall income and any capital gains
  • claim any tax allowances against your tax bill

Once you start getting the State Pension you must declare this on your tax return. This is because it's taxable income that is paid to you without tax taken off.

If you're not completing a Self Assessment tax return and you're approaching or are aged 65 you can ask HM Revenue & Customs (HMRC) to send you a P161 Age-related Personal Allowance form. You can also download the form using the 'Form P161 Age-related Personal Allowance' link below.

HMRC will use the information you give them to work out what tax-free allowances you're entitled to and how much tax (if any) you should be paying when you start to get your pension income. It’s important you return this form so that HMRC can work out how much tax you need to pay.

Remember that you stop paying National Insurance contributions from State Pension age - so you'll no longer need to include these on your tax return. The only exception is Class 4 National Insurance contributions which are due on taxable profits made in the tax year in which you reached State Pension age.

If you're self-employed and get a company or personal pension and the State Pension

If you're self-employed and getting one or more pensions as well as the State Pension, you'll pay tax in a number of different ways.

You'll pay tax on your self-employment income (and usually on other sources of untaxed income, apart from the State Pension) through Self Assessment after completing a tax return each year. You'll pay tax on any company or personal pension you receive through the PAYE system. HMRC issues a tax code that tells the pension provider how much to take off your pension(s) before they pay you.

The tax code is based on the information you've given about your overall income. If you get the State Pension as well, HMRC normally asks your pension provider to take off any tax owed on it at the same time by giving them a new tax code for you.

If you're self-employed and on a low income

If you're self-employed and you get a pension you may be on a low income. In this case you may be able to claim Pension Credit to supplement your low income.

Becoming self-employed for the first time

You may decide to become self-employed for the first time in retirement. If you do you'll need to register with HMRC. Follow the link below to find out more about how to register.

Employing an accountant

You don't have to employ an accountant (agent) if you don't want to, but you may find that for a fee an accountant can help you manage your tax return. HMRC will need your written permission before they can deal with your professional tax adviser or accountant.

If you're worried about your tax

If you're worried that you're paying too much tax or if you have any other questions about tax and self-employment after State Pension age, you can contact HMRC. You can also call the Newly Self-Employed Helpline.

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