Taxes are paid on total income above the Personal Allowance, which in 2021/22 currently sits at £12,570 per year.
Any income above this threshold is subject to Income Tax.
The tax rate between £12,570 and 37,700 in England, Wales and Northern Ireland is 20 percent. After this point, higher rates are paid.
However, people born before April 6, 1948 may be entitled to a larger Personal Allowance.
People may think that living in retirement will be tax-free but this is not the case.
In retirement, total income can include the state pension, a private pension, earnings, any taxable benefits and any other income from investments, property or savings.
It’s important to note that the state pension is taxable, so state pension payments count towards annual taxable income. However, Pension Credit is not a taxable form of income.
People won’t usually pay any taxes if their annual total income adds up to less than their Personal Allowance.
There are also tax benefits that come with other forms of retirement income, such as private or workplace pension savings.
One of these is that pensioners can usually take up to 25 percent of the value built up in their pension pot as a tax-free lump sum.
This 25 percent tax-free lump sum is one of the most popular perks of saving for a pension, with 54 percent of workers planning to take up the deal.
People don’t usually pay taxes on their pension if they’re not a UK resident, but may have to pay them in the country in which they reside.
There are a few exceptions to this. Taxes on civil service pensions, for example, are always paid in the UK.
People who live in countries without a double taxation agreement may have to pay taxes in both countries.
People can get free impartial guidance from Pension Wise or advice from a financial advisor if they wish.
A lifetime limit to what can be saved into a pension also exists. This is the total amount paid by someone into all their pensions excluding state pensions and it is currently £1,073,100.
If savings into a person’s pension exceed 100 percent of their earnings in a year then this also limits the tax relief that is received.