State Pension - Taxed by the back door

IanBerry

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.

Nasqueron

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 taxed

ader42

My thoughts? You are in a very fortunate position. 

Marcon

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.

Everyone who has taxable income above their personal allowance is taxed on the amount by which it exceeds the personal allowance and regardless of the source of that income. Those who have income below the PA don't pay tax, so it's simple arithmetic.

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. 

p00hsticks

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.

It's the same as saying that someone only earning (say ) £10k a year isn't taxed, and those who earn double that 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. 

Andy_L

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.

ader42

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. 

Silvertabby

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.

Similar age and situation - 22 year RAF pension, small LGPS pension, and full nSP.  Do I feel hard done by due to the amount of income tax I pay?  Absolutely not.  You, me and others like us are in no way penalised - the State pension has always been taxable income, and I have no problems paying my fair share of tax. I'd much rather be in this situation than not be liable for tax because my total income was less than £12,570 a year.

IanBerry

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.

sammyjammy

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.

Phoenix72

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.

Who has banded that statement around? Who has this misconception? Only you from what I can see. It's taxable in the same way as if your only source of income was from employment of £10k or investments of £11k. You are confusing taxable and having a liabilty to tax.