Ghurka on hunger strike slams UK government for £47 pension
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Pension pots can help people financially in retirement and later life. But like most sources of income, pensions are subject to tax in some cases. How much tax someone pays on their pension is largely down to their Personal Allowance.
How much tax will you pay on your pension?
Everyone has an annual Personal Allowance, which is the amount someone can earn tax-free.
Currently, the standard Personal Allowance is £12,570, but this may be smaller or larger for some people depending on their circumstances.
For example, people who claim Marriage Allowance or Blind Person’s Allowance may get a bigger Personal Allowance.
How much tax will I pay on my pension? Personal Allowance rules explained (Image: GETTY)
How much tax someone pays on their pension will depend on their circumstances (Image: GETTY)
But people who have an income above £100,000 will usually have a smaller Personal Allowance.
When it comes to pensions, people will pay tax if their total annual income exceeds their Personal Allowance.
Earnings from employment/self-employment, investments, property, savings or taxable benefits all count towards total income.
But total income also takes into account any private pension, State Pension or Additional State Pension someone gets.
Pension pots can help people financially in retirement and later life (Image: GETTY)
Usually, someone won’t pay any tax if their total income is less than the Personal Allowance.
But if someone who claims their pension finds their income goes above their Personal Allowance, they may need to pay tax on this amount.
Income tax rates and bands are set by the Government, and how much tax someone pays will depend on how much income they get over their Personal Allowance threshold.
The Government website adds: “You may have to pay Income Tax at a higher rate if you take a large amount from a private pension.
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“You may also owe extra tax at the end of the tax year.”
Private pensions which total more than £1,073,100 may also be subject to a tax charge, which a pension provider should take off prior to payment.
Pension providers will usually take any owed tax off before payment, along with any tax owed on State Pension payments.
But people who only claim a State Pension as their sole income will need to fill in a Self Assessment tax return if they owe any tax.
People claiming their pension on or after April 6, 2016 do not need to send a tax return, as HMRC will write to tell the person how much they owe and how to make the payment.
Can you take some of your pension tax-free?
Up to 25 percent of a pension pot can usually be taken out tax-free as a lump sum.
This lump sum does not usually affect someone’s Personal Allowance.
But the remaining amount will have tax taken off before it is paid out.