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State Pension - Taxed by the back door
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IanBerry
Posts: 9 Forumite

I am aged 69 and as such receive a State Pension. I worked full time from 1971 to 2016 and paid contributions as required. From 1973 (when I became 18) to Apr 1995 via my Army pay and May 1995 to 2016 via civilian industry salary. As such I receive a military pension and a former company pension, which when added to my State Pension clearly exceeds the £12570 threshold (plus the transfer of part of my non working wife's allowance). State Pension is considered INCOME for taxation purposes, so my income is based on my State Pension plus Military and Company Pension and hence tax is deducted based on the TOTAL INCOME less the statutory allowance. My issue therefore is that persons whose only income is the State Pension under the £12570 allowance are not taxed on their State Pension, however those who have other pension incomes are. I have no issue paying my fair share of the tax but I have never been able to get this clear in my head and feel in some way penalised and would welcome some thoughts.
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Why do you believe if you earn over the tax threshold there is an issue with paying tax while someone under the limit doesn't? Many (all?) pensions are exempt from NI so why is it "by the back door"?
There are plenty of very wealth pensioners on final salary schemes earning significant sums, some even more than the average income of workers, it's quite right they are taxed.
If anything, we should scrap NI altogether and put up income tax so everyone who earns above the threshold is fairly taxedSam Vimes' Boots Theory of Socioeconomic Unfairness:
People are rich because they spend less money. A poor man buys $10 boots that last a season or two before he's walking in wet shoes and has to buy another pair. A rich man buys $50 boots that are made better and give him 10 years of dry feet. The poor man has spent $100 over those 10 years and still has wet feet.
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My thoughts? You are in a very fortunate position.6
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IanBerry said:My issue therefore is that persons whose only income is the State Pension under the £12570 allowance are not taxed on their State Pension, however those who have other pension incomes are. I have no issue paying my fair share of the tax but I have never been able to get this clear in my head and feel in some way penalised and would welcome some thoughts.
Rather than feeling hard done by because you are paying tax on your state pension, would it make you feel any better to reverse your thinking and see it as paying tax on your military and company pensions? If not, then possibly consider that anyone who doesn't pay tax on their state pension is on such a low income they are going to be having a very rough time financially, whereas you will be more comfortable because you have additional income.Googling on your question might have been both quicker and easier, if you're only after simple facts rather than opinions!7 -
Everyone hIanBerry said:My issue therefore is that persons whose only income is the State Pension under the £12570 allowance are not taxed on their State Pension, however those who have other pension incomes are.
The standard tax allowance for those with income under £100k is currently £12,570, and people generally pay tax on any income higher than that, whether that income comes from taxable state benefits (such as the state pension, Carers Allowance, job Seekers Allowance), private pensions or employment.
I don't pay any tax on my private pension at the moment, but that's because it's less than my personal allowance and I don't yet qualify for a state pension. When I do reach 66, then I'll expect to pay tax - and because the state pension is taxable income but not taxed at source, any tax due will then be taken from my private pension.2 -
You only pay tax on taxable income above the personal allowance.
Someone, like you, who's income is above the allowance pays tax on the amount above. Someone who's income is below the allowance, by definition, pays no tax.
It matters not if the income is salary and/or pension.1 -
Yep, I have always thought of it as the State Pension not being taxed but other additional pensions being taxed as income. It makes more sense to consider it that way, especially as that is also how it works in practice.
The tax does not come off the state pension (except in any rare instamces where the state pension exceeds the personal allowance), it comes off the additional pensions.0 -
IanBerry said:I am aged 69 and as such receive a State Pension. I worked full time from 1971 to 2016 and paid contributions as required. From 1973 (when I became 18) to Apr 1995 via my Army pay and May 1995 to 2016 via civilian industry salary. As such I receive a military pension and a former company pension, which when added to my State Pension clearly exceeds the £12570 threshold (plus the transfer of part of my non working wife's allowance). State Pension is considered INCOME for taxation purposes, so my income is based on my State Pension plus Military and Company Pension and hence tax is deducted based on the TOTAL INCOME less the statutory allowance. My issue therefore is that persons whose only income is the State Pension under the £12570 allowance are not taxed on their State Pension, however those who have other pension incomes are. I have no issue paying my fair share of the tax but I have never been able to get this clear in my head and feel in some way penalised and would welcome some thoughts.6
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I had a feeling this might spark some discussion but it is the statement that is banded around of 'State Pension is not taxable', that is a general misconception. I accept that if it is your only income and it is below the allowance threshold, then clearly this is correct but not when added to other pension income. It's the wording that is misleading, not the actual requirement to pay tax. State Pension becomes taxable as income when the income tax threshold is exceeded.0
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No State pension has always been taxable its just that the tax system works so that your allowance is used on that first and any other income after that uses the remainder, if any."You've been reading SOS when it's just your clock reading 5:05 "1
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IanBerry said:I had a feeling this might spark some discussion but it is the statement that is banded around of 'State Pension is not taxable', that is a general misconception. I accept that if it is your only income and it is below the allowance threshold, then clearly this is correct but not when added to other pension income. It's the wording that is misleading, not the actual requirement to pay tax. State Pension becomes taxable as income when the income tax threshold is exceeded.2
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