Thank you for contacting me about taxation in retirement.
Tax on income you receive from one or more pensions is calculated
in the same way as earnings from employment. There is an annual personal
allowance, which means that you can have an annual pension income of up to
£12,570 (2023/24 tax year) that is not taxed. Income above this threshold is
subject to tax at rates of 20 per cent, 40 per cent, or 45 per cent depending
on your overall total income.
However, individuals are able to take what is called a ‘lump sum’
out of their pension pot tax-free without it contributing to their personal
allowance. This is usually 25 per cent. Beyond the 25 per cent tax-free lump
sum, income tax applies.
Additionally, while the State Pension counts towards your taxable
income, it will be paid gross (before any tax is deducted). If your total
income from all sources, including the State Pension, is greater than your
tax-free personal allowance, tax on your State Pension is due.
Income tax will normally be deducted from any private pension,
workplace pension or earnings you might have which are paid through the PAYE
system. However, if you do not have a PAYE income, you will have to complete a
self-assessment tax return and pay any tax due directly to His Majesty’s Revenue
and Customs (HMRC) after the end of the tax year.
Thank you again for taking the time to contact me.
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