State Pension - Taxed by the back door

xylophone

 banded around of 'State Pension is not taxable',

If this is being bandied around then what is being bandied around is simply incorrect.

https://www.litrg.org.uk/pensions/state-pension/tax-state-pension/how-tax-collected-state-pension#:~:text=one tax code.-,Collection through PAYE,income that exceeds your allowances.

The Department for Work and Pensions (DWP) does not operate Pay As You Earn (PAYE) on your state pension – so you receive it gross, without any tax collected at source before it is paid to you.

This means that it will often be the case that tax must be collected on your state pension via another PAYE source of income (for example another private pension, if you have one). As a result, the PAYE system collects tax on two sources of income through one tax code.

If it is not possible for HMRC to collect the tax due on your state pension through the PAYE system, you may have to complete a self assessment tax return each year. Alternatively, HMRC may send you a simple assessment.

Pat38493

xylophone said:

 banded around of 'State Pension is not taxable',

If this is being bandied around then what is being bandied around is simply incorrect.

https://www.litrg.org.uk/pensions/state-pension/tax-state-pension/how-tax-collected-state-pension#:~:text=one tax code.-,Collection through PAYE,income that exceeds your allowances.

The Department for Work and Pensions (DWP) does not operate Pay As You Earn (PAYE) on your state pension – so you receive it gross, without any tax collected at source before it is paid to you.

This means that it will often be the case that tax must be collected on your state pension via another PAYE source of income (for example another private pension, if you have one). As a result, the PAYE system collects tax on two sources of income through one tax code.

If it is not possible for HMRC to collect the tax due on your state pension through the PAYE system, you may have to complete a self assessment tax return each year. Alternatively, HMRC may send you a simple assessment.

Martin Lewis talked about this on a recent podcast - he made it clear that the state pension has always been taxable income, but some people are confused because it has been below the personal allowance for a long time so anyone who had no other income wouldn't pay any tax, so they concluded wrongly that it was not taxable.

IanBerry

@xylophone posted a link which this forum will not allow me to quote (appears I haven't been here long enough) but the link details 'Donald's' situation... I was particularly interested in the closing sentence (not my words)

Donald receives a company pension of £9,000 a year and a state pension. His state pension for 2024/25 is £11,500.

We work out what tax-free allowances can be set against Donald's company pension (once the state pension has been taken into account) like this:

	£
Personal allowance for 2024/25	12,570
Minus: state pension	(11,500)
Allowances to go against company pension	1,070

This means that of the £9,000 company pension he receives, Donald will pay tax on £7,930 (£9,000 - £1,070). This is because the state pension is taxable and is using up most of his personal allowance for the year. 

Marcon

IanBerry said:

@xylophone posted a link which this forum will not allow me to quote (appears I haven't been here long enough) but the link details 'Donald's' situation... I was particularly interested in the closing sentence (not my words)

Donald receives a company pension of £9,000 a year and a state pension. His state pension for 2024/25 is £11,500.

We work out what tax-free allowances can be set against Donald's company pension (once the state pension has been taken into account) like this:

	£
Personal allowance for 2024/25	12,570
Minus: state pension	(11,500)
Allowances to go against company pension	1,070

This means that of the £9,000 company pension he receives, Donald will pay tax on £7,930 (£9,000 - £1,070). This is because the state pension is taxable and is using up most of his personal allowance for the year. 

The closing sentence is entirely accurate, so not sure why you were 'particularly interested' in it?

cloud_dog

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 think there is a misunderstanding, either by the bandying people or the people consuming the bandying.  Again I appreciate that this might be bleeding obvious but the error is that State Pension is not taxed, not that it is not liable for taxation.

So, if you have other taxable income that will be taxed as including the SP amount.

IanBerry

@Marcon that is exactly the point I have been trying to make. State Pension is taxable... In my case for example, because I have other pension income, the tax that is levied on the other income reduces the State Pension I receive, by 20%, I know that the tax isn't actually being applied to State Pension but that in effect is what is happening, so the 'You don't pay tax on your State Pension' is misleading unless you actually understand what is happening. Don't get me wrong, I would much rather have 80% of what is being paid than nothing  

Marcon

IanBerry said:

@Marcon that is exactly the point I have been trying to make. State Pension is taxable... In my case for example, because I have other pension income, the tax that is levied on the other income reduces the State Pension I receive, by 20%, I know that the tax isn't actually being applied to State Pension but that in effect is what is happening, so the 'You don't pay tax on your State Pension' is misleading unless you actually understand what is happening. Don't get me wrong, I would much rather have 80% of what is being paid than nothing  

It's the missing words, isn't it: state pension isn't taxed at source. Add those two extra words (blame sloppy reporting when they don't!) and all is clear.

kimwp

IanBerry said:

@Marcon that is exactly the point I have been trying to make. State Pension is taxable... In my case for example, because I have other pension income, the tax that is levied on the other income reduces the State Pension I receive, by 20%, I know that the tax isn't actually being applied to State Pension but that in effect is what is happening, so the 'You don't pay tax on your State Pension' is misleading unless you actually understand what is happening. Don't get me wrong, I would much rather have 80% of what is being paid than nothing  

If you think your state pension is effectively being reduced by 20%, what do you think is effectively happening to your other income?

GibbsRule_No3.

Marcon said:

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. 

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. 

Curious, if people do only have the State Pension to live on but can get Pension Credit, could that Pension Credit take them above the £12570 but they still would not pay any tax, or could you not get PC?  Lucky enough not likely to be in a position to apply for any benefits due to Private Pensions and even when I do finally stop working two days a week, those PPs will mean I’ll still be paying tax until I die.

Phoenix72

GibbsRule_No3. said:

Marcon said:

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. 

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. 

Curious, if people do only have the State Pension to live on but can get Pension Credit, could that Pension Credit take them above the £12570 but they still would not pay any tax, or could you not get PC?  Lucky enough not likely to be in a position to apply for any benefits due to Private Pensions and even when I do finally stop working two days a week, those PPs will mean I’ll still be paying tax until I die.

Pension credit is not taxable.