Tax in Retirement: Pensions

When you retire, you will be receiving income from a number of sources such as a private pension, state pension and savings. You may also have income from some part time work or self-employment of sorts. This can make keeping track of taxes very difficult. Here we explain how these various types of income are treated for tax purposes.

1. Occupational and Private Pensions

Pensions are taxed on the same basis as employment tax under the PAYE scheme. Occupational and private pensions will usually have tax deducted by the pension provider in line with the tax code that they have been given. This takes into account any state pension that you receive against your personal tax allowance.

If you have multiple private pensions, your personal allowance is usually allocated against the main pension. Any additional schemes are normally taxed at 20%. If you are not being given your full personal allowance and your tax codes are wrong, then you will have to contact the HMRC.

There is guidance on the HMRC website on the taxation of pensions. There is also guidance on what to do if you have overpaid tax on your pension.

2. Tax on State Pensions

The Department for Work and Pensions (DWP) does not deduct tax from your state pension, but (contrary to common belief) it is taxable income. The adjustment is usually made to your PAYE tax code for your private pension. This means that part of your personal allowance is allocated against your state pension and the remainder is allocated to your other income.

If an incorrect PAYE tax code is used, then the wrong amount of tax will be collected. If you have a large state pension that exceeds your personal allowance on its own, you may be underpaying. If you feel that you are being overcharged on your personal allowance, then you should contact the HMRC. You can do this by completing a self-assessment tax return.

You are likely to pay income tax if your taxable income, including your pension and state pension, is more than your personal tax allowance. Income tax is deducted from any income above that allowance.

3. Charges on Other Untaxed Income

If you have other untaxed income as well as a state pension, and your total income is more than your tax free allowance, then you will have to complete an annual tax return. You may need to complete this if, for example, you have rental income or are self-employed. In this case you will have to pay any tax due direct to HMRC on 31 January following the end of the tax year (5 April).

4. Tax-Free Lump Sum Withdrawal

When you retire, you can withdraw a lump sum from your private or occupational pensions tax free (within a given limit). If you have only built up a small pension fund, you can withdraw the whole amount as a lump sum and only pay tax on part of it. This applies when you have saved less than £30’000 in personal pensions. If you have more than one pension, this limit applies to the total, not to each. Depending on your income, you may be able to claim some money back on the element of the lump sum that is taxed. To make the claim, you should request a form P53 from the HMRC.

How to Prepare

If you are nearing retirement age, 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 also receive a P161 Age -related Personal Allowance form. This needs to be filled out promptly and accurately to ensure that you are receiving all allowances. If you are within a month or State Pension age or later, then contact the HMRC and request the form yourself.


For more information, visit the gov.uk website to work out your personal allowance and to get a clear idea of taxable and non-taxable income. It is essential to work this out sooner rather than later to avoid overpaying or underpaying tax and getting a shock later on.  


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