National Insurance and 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 usually get a bigger Personal Allowance if you were born before 6 April 1938.
To claim a bigger allowance or if you already have a bigger allowance but expect your income to go down by the end of the tax year, fill in form P161, available on the GOV.UK website.
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 tax 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 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.
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. This means you may only have to pay tax on your half of the 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 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)
For more information on taxable and non-taxable income visit the following page at the GOV.UK website.
Step two – add up your tax-free allowances
Your tax-free allowances are income amounts you earn without paying tax. The Personal Allowance and the Blind Person's Allowance are tax free amounts.
Most people have a Personal Allowance - an annual amount of tax-free income. The rate of Income Tax you pay depends on how much taxable income you earn above your allowance.
|Personal Allowance if born on or after 6 April 1948||£10,000||£10,600|
|Personal Allowance if born between 6 April 1938 and 5 April 1948||£10,500||£10,600|
|Personal Allowance if born before 6 April 1938||£10,660||£10,660|
If you were born on or after 6 April 1948
If your income is between £27,000 and £100,000 in 2015-2016, your Personal Allowance reduces by £1 for every £2 of income above £27,700 to a minimum Personal Allowance of £10,000.
Your income is over £100,000
Your Personal Allowance reduces by £1 for every £2 of income above £100,000. If your income is very high, your Personal Allowance can reduce to zero.
Blind person's allowance
If you're registered as blind you can claim Blind Person's Allowance. This is an amount of income you can get without paying tax. For 2015-2016 the allowance is £2,290. To claim this in Northern Ireland you must be unable to perform any work for which eyesight is essential.
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 tax payer and you 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.
Remember that you may qualify for other allowances such as Married Couple's Allowance and Maintenance Payments Relief that can reduce your tax bill. In some cases this may mean that you have nothing to pay at all. Follow the link below for '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 Tax Review form P810 to report your income or to pay your tax through Self Assessment.
How to contact HMRC
To contact HMRC follow the 'Contact HMRC' link below. You will need to tell HMRC your National Insurance number.
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.
Income Tax rates and bands
Your income tax rate depends on the annual amount of your total income:
|Income Tax rate||Income bands in 2015-2016|
|Basic rate 20%||£0 - £31,785|
|Higher rate 40%||£31,786 - £150,000|
|Additional rate 45%||over £150,000|
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.