Plan your retirement – paying tax on your pension

When it comes to retirement, we all want things to run smoothly. 

This means ensuring that you are aware of any tax obligations you may have when receiving your pension. 

Paying tax on your pension can be complicated. However, with the abolition of the Lifetime Allowance (LTA) in April this year, things may become simpler. 

What is taxed 

As with income from work, you pay tax if your total annual income exceeds your Personal Allowance of £12,570. 

Everyone will have variations in the way they receive their annual income, but it could include: 

1. State Pension 
2. Additional State Pension 
3. Private Pensions 
4. Earnings from employment or self-employment 
5. Taxable benefits 
6. Money from investments, property, or savings 

You will also be taxed on your private pensions above the value of £1,073,100. This can be increased if you hold lifetime allowance protection. 

Under the previous legislation, you would be charged at a rate of 55 per cent if your private pension was received as a lump sum, or 25 per cent if it was received in smaller increments. 

However, since 6 April 2023, this has changed. Instead of paying under the LTA, you are charged Income Tax on some or all of your private pension, whether it is taken as a lump sum or in smaller payments. 

How is tax paid? 

The way you pay tax depends on what pensions you receive and any other income you are generating. 

When you are only receiving the State Pension, your income will likely be below the Personal Allowance, meaning you will not need to pay any tax. 

If you get both a State Pension and a private pension, your pension provider will take off any tax you owe. This also applies if you have multiple providers, as HM Revenue & Customs (HMRC) will contact one of your providers to remove the tax from your State Pension. 

For those continuing to work, you will Pay As You Earn (PAYE). If you have an employer, they will automatically take any tax due off your earnings and State Pension. 

If you are self-employed, you will need to fill out a Self Assessment tax return. In this, you must declare all your forms of income. This applies to any other forms of income that you receive. 

Although this sounds simple, it can be easy to get tripped up with tax. We can help you fulfill your tax obligations easily, without worrying about any errors. 

Planning your pensions 

With more of an understanding of how taxation works regarding pensions, it is easier to plan for your retirement. 

There are five simple steps you need to consider before you retire: 

1. Check when you can retire, and if you can retire early with a workplace or personal pension 

1. Find out how much pension you could receive 

1. Look at increasing your pension 

1. Check what financial support is available 

1. Decide when to retire 

Whilst this may sound simple in theory, in practice it can still be complex. 

Planning your pension is something that must be taken seriously. With the advice of an expert on hand, you can make sure that you are getting the most out of your pension. 

If you have specific questions or require tailored advice about planning your pension, please get in touch with the team at Iceberg Accounting.