For millions of people, the state pension is the bedrock of retirement finances. As a result, individuals will want to receive the highest amount possible, especially amid the cost of living crisis.
However, retirees should be aware of the tax implications which apply to the state pension.
Income from the state pension is taxable under the Government’s rules, but whether it is deducted depends on circumstances.
The payment is usually paid without tax being deducted, but that does not mean some will not have to bear tax implications in mind.
The amount of income tax a person pays is dependent on their total annual income from all sources.
Of course, what people get from the state pension will vary, typically according to their National Insurance contributions.
Tax is not deducted directly from the state pension, but it will use up some of a person’s tax-free Personal Allowance.
For example, if an individual receives the full new state pension, they will get £9,627.80 per year.
Taking this away from their personal allowance it means they would have £2,942.20 remaining.
Tax charges are also applicable for those who save above a particular threshold.
People will pay a tax charge if the total value of their private pensions exceeds £1,073,100.
This is known as the Lifetime Allowance, which has garnered some level of controversy.
A person’s pension provider will take off the charge before they receive their payment, if it is applicable.
People will not typically pay any tax if their total annual income adds up to less than their Personal Allowance.