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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 State Pension – is more than your tax-free allowances you'll still have to pay tax.

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 enquiry 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

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'll have to pay taxand 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 non-taxable. 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 types 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 furnished room in your house
  • income from abroad (overseas pensions have a 10 per cent deduction so you are only taxed on 90 per cent of the total amount)
  • some benefits, including Carer's Allowance, Employment and Support Allowance and, in some cases, Incapacity Benefit

If you're 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.This means you may only have to pay tax on your half of the joint income. If you're not married or you're notin a civil partnership count only your share of joint income.

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

Non-taxable income

Non-taxable income 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 (but not lump sums from deferring a State Pension or foreign pensions)
  • Taxable and non-taxable income at a glance

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 and if you're 65 orolder and your taxable income is below certain levels the rate increases.

Personal allowance rates 2012-2013 Income limit (see note)
Basic amount for someone under 65 £8,105 £100,000
Age 65 to 74 £10,500 £25,400
Age 75 or over £10,660 £25,400

The age-related allowances are reduced by half the amount (£1 for every £2) your taxable income is over your income limit. Basic Personal Allowance reduces where the income is above £100,000 by £1 for every £2 of income above the £100,000 limit. This reduction applies irrespective of age.

So if, for example, you're 66 and have a taxable income of £25,900 (£500 over the limit) your age-related allowance of £10,500 would reduce by £250 (£500÷ 2) to £10,250.

If you're 66 and have an income of £35,400 (£10,000 over the limit) your age-related allowance of £10,500 will reduce by £5,000 (ie £10,000 ÷ 2) to become £5,500. However, you can't get less than the basic allowance unless your income is more than £100,000 so you'll get £8,105.

If you’re 66 and have taxable income of £110,000 (£10,000 over the basic limit) your basic allowance will be reduced by £5,000 (ie £10,000 ÷ 2) to become £3,105.

Blind person's allowance

If you're registered as blind with a local authority in England and Wales you can claim Blind Person's Allowance. To claim this in Scotland or Northern Ireland you must be unable to perform any work for which eyesight is essential. As with your Personal Allowance, this is an amount of income you can get without paying tax. For 2012-13 the allowance is £2,100.

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 taxpayerandyou must contact HMRC if you're not already paying tax. If there's nothing left you shouldn't be paying tax and may be due a refund.

Rememberthat you may qualify for other allowances such as Married Couple's Allowance and Maintenance Payments Reliefthat can reduce your tax bill. In some cases this may mean that you have nothing to pay at all.Follow the link belowfor 'Introduction to tax allowances and reliefs if you pay tax' to find out more.

If you already pay tax through PAYE, HMRC may be able to collect any extra tax you owe including that on your State Pension through PAYE if any of the following apply:

  • you're getting a personal (including retirement annuity) or company pension
  • you work part time

Otherwise they'll ask you to complete a Tax Reviewform P810 to report your incomeor to pay your tax through Self Assessment.

How to contact HMRC

If you want to phone or write to HMRC follow the 'Contact HMRC' link below. If you're self-employed and want to write use the 'Find a Tax Office for the Self Employed' link below. Whether you phone or write HMRC will need your National Insurance number, if possible.

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, follow the link ' Claiming back tax or National Insurance' to see what steps you can take to claim a refund.

Getting help and advice

The organisations below can provide you with free, independent tax advice. Please note the list isn't exhaustive and the links are to external organisations which are not managed by HMRC.

More useful links

Do it online

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