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Do you pay tax on the State Pension ?

Updated: May 5, 2023

Here at money mentor, we are frequently asked “do you pay tax on the state pension” ? and if so how does it work in practice.

In today's blog we are going to answer the question do you pay tax on the state pension, and also set out how the taxation process works in the real world, so hopefully as and when it is time to consider drawing your state pension, you will know if you are likely to be taxed on it, or alternatively if you will be taxed on another source of income because you are now drawing your state pension.

Do you pay tax on the State Pension

As always, if you have any observations or questions on this do you pay tax on the state pension blog, then please feel free to leave a comment in the comments box below or contact us directly using our email addresses or social media platforms.

So, do you pay tax on the State Pension ?

Tax is never deducted directly from the state pension. However, it is a taxable benefit and is treated for tax purposes as pension income.

Pension income is taxed in the same way as earned income ( i.e. it is taxed before savings income and dividend income) and so can make use of the individuals personal allowance and basic rate tax band.

If total taxable income from all sources , the state pension, other pensions, savings, investments etc is below the individual's personal allowance, then no tax is owed and the state pension is paid gross with no tax due.

However, if total income including the state pension received is above the individual’s personal allowance, then any tax owed on the state pension can be collected in one of three ways.

1. If the individual receives income from another pension, the tax owed on the state pension is collected from their other pension using PAYE via an adjustment to their tax code,

2. If they are not in receipt of another pension, but are still working, then the tax owed on the state pension is collected through their employers PAYE scheme,

3. if they are not working and have no other pension income then the tax owed is collected via their self-assessment tax return.

Where a spouse or civil partner who reached SPA before 6th of April 2016 is entitled to a category B pension, this is treated as part of their income for tax assessment purposes.

Where an individual who reached their SPA prior to 6th of April 2016 defers receipt of their state pension for at least 12 months, they have the option of receiving the amount deferred as a lump sum.

This lump sum is taxable at the same rate as the individuals other income and cannot put them into a higher tax bracket. In other words, if their taxable earnings are below their personal allowance, i.e they do not pay income tax at the time of the payment, the lump sum is tax free, even if its value pushes their earned income over their personal allowance.

We do hope this blog has given you an insight into the question do you pay tax on the State Pension , and therefore helps you with your future state pension planning.

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