Financial advisory firm Almary Green explains when and why some pensions are taxable.
Q: I'm due to retire early next year and should get a full state pension as I've been working all my life. I've been working for the local district council for about 25 years so will get a decent pension from their pension fund too. I thought that when I retire I won't have to pay tax but a friend who has retired recently tells me she is paying tax on her pension. Is that right?
A: Yes, that's correct. When you reach state retirement age, you stop paying National Insurance even if you are still working (unless you are self-employed paying Class 4 contributions) but you will pay income tax if your income is more than your Personal Allowance.
The Personal Allowance for this tax year (April 6 2018 to April 5 2019) is £11,850 (provided you earn no more than £100,000 in the tax year), so any income you have over and above that figure will be subject to income tax.
It's worth remembering that if you have savings income, you will benefit from the Personal Saving Allowance which for basic rate taxpayers is £1,000 – so any interest you get on savings up to this figure will be free of tax.
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