Money
Pensions
Tax and state pensions - frequently asked questions
Being able to draw a state pension is to some, the reward for years of paying into the Government's coffers. It means at last you can get something back. But, unsurprisingly, the Government doesn't like handing money out for free. And, if it can, it will snatch back the cash. Here finance journalist Simon Read answers your questions about the state pensions and tax
Q - Do I have to pay tax on my state pension? A - Yes, your state pension is not tax-free. However, it is paid to you without any tax deducted. It means you need to work out whether any tax is due or not and ensure that you pay it.
Q - How will I know if any tax is due? A - Add up all your taxable income. This will include your state pension, any company pension, and income from investments, but won't include Pension Credit or interest from an ISA. You can get a complete list of what's taxable or not from form IR121. [download it from www.hmrc.gov.uk/leaflets/ir121.pdf] Tot it all up and if the total is higher than your tax-free allowances, then you will have to pay tax.
Q - What are my tax-free allowances? A - For the tax year 2007-08 you are allowed to earn £5,225 and pay no tax if you are aged less than 65. If you're 65-74 and your total income is below £20,900, then you can earn £7,550 tax-free. Aged 75 or over and the total rises to £7,690.
Q- What happens if I do have to pay tax? A - If you have a company pension, then your tax will usually be paid through that. Your pension provider should have been provided with a new tax code for you which takes account of your state pension. If you don't have a company pension but have other income that pushes the total above the tax-free allowance then you'll have to complete a self-assessment form. You can get forms from your local tax office.
Q - What happens if I get a job, or am still working? A - Then your employer should ensure you pay the relevant tax through its PAYE scheme. You should be sent a P2 Notice of Coding form for the tax office once a year telling you your tax code. Check to make sure it's right, otherwise you could end up handing over too much cash to the government.
Q - What happens if I decide to retire abroad? A - There's no escape from tax, even if you move away from the UK! Your pensions will still be taxable unless the country you're moving too has what is known as a double taxation agreement, then you'll pay tax in that country. For more details call the Centre for Non-Residents on 0845 0700 040.
* Simon Read's views represent his own opinions and are for general information only. Always seek independent financial advice.
