Many of us have the goal of living comfortably and at ease when we retire, and it is a worthy goal. We want to be sure that we are living in relative comfort; we deserve it, after all, after having worked hard all our lives. And one way to make sure that you are living well even when you are no longer working is to have a pension. Pension schemes in the UK include both state pensions, workplace pensions, and private pensions of your choosing. But having a pension also means dealing with taxes, and in some situations, taxation can be quite complex and challenging to understand. Here, then, is what you need to know about taxation when it comes to your UK pension.
What is taxed?
Essentially speaking, you will have to pay tax if the total income you receive per year is more than the personal allowance you receive. The personal allowance is currently £12,500. So, what about your total income? What comprises your total income? Basically, your total income can include such things as your state pension and additional state pension (an additional amount you can receive on top of your state pension if you are born prior to the 6th of April 1951 if you are a man, or prior to the 6th of April 1953 if you are a woman). Furthermore, your total income could include any private or personal pension you receive, although you can take some of this without paying any tax. It can also include your earnings or income as an employee or as a self-employed individual, any benefits you get which are taxable (such as jobseeker’s allowance, carer’s allowance, incapacity benefits, bereavement allowance, widow’s pension, or more), and other forms of income such as the money you earn from savings, property, or investments.
Keep in mind that if you have a private pension and it amounts to over £1,055,000 per year, then you may have to pay additional tax. Your provider will take care of this charge or fee prior to you getting your pension payment. You can, however, take advantage of tailor made pensions where your provider can give you crucial advice on how you can benefit from a better investment; it’s best to know your options more clearly so you can make the right decision regarding a tailor made pension.
What is tax-free?
On the other hand, if your total income per year is not greater than your personal allowance, then you can have your pension tax-free. But you can take as much as 25% of your pension as a lump sum (whether it’s a state or personal pension) without paying any taxes, even if your income is greater than your personal allowance. This lump sum, which is tax free, does not have any effect on your personal allowance. To give you a clearer idea, let’s say you have a pension that amounts to £60,000. If you so choose, you can take 25% of the £60,000, which is £15,000, without paying any tax on this. Then the provider of your pension will simply take the tax from the remaining amount, which is £45,000.
There are other factors you should know when it comes to your pension as well. For example, the time you can take your pension will depend on the rules of the pension, but generally, people can get their pension at around 55 years of age.
Image attributed to Pixabay.com