How much tax will I pay on my pension? Personal Allowance rules explained

Ghurka on hunger strike slams UK government for £47 pension

Make the most of your money by signing up to our newsletter for FREE now

Invalid email

We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info

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.

READ MORE: Employers tell all about DWP job scheme for UC claimants

People looking at laptop

How much tax will I pay on my pension? Personal Allowance rules explained (Image: GETTY)

Pot of coins

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.

Retired people walking with their dog

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.

DON’T MISS:

Rishi Sunak tax raid could hit inheritance, capital gains and pensions [ANALYSIS]

Britons urged to look at their paycheck – ‘accelerate finances’ [INSIGHT]

Pension warning: Dependence on state pensions to worsen [WARNING]

Best and worst cities to retire in

Best and worst cities to retire in (Image: EXPRESS)

“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.

Harry Byrne

Harry Byrne

Related post