The way tax is paid depends on the kind of pension you get, and whether you have any other income.
If you get the State Pension and a private pension
Your pension provider will usually take off any tax you owe before they pay you. They’ll also take off any tax you owe on your State Pension.
If you get payments from more than one provider (for example, from a workplace pension and a personal pension), HM Revenue and Customs (HMRC) will ask one of your providers to take the tax off your State Pension.
At the end of the tax year you’ll get a P60 from your pension provider showing how much tax you’ve paid.
If the State Pension is your only income
If you go over your Personal Allowance and you have tax to pay, HMRC will send you a Simple Assessment tax bill. This will tell you how much you owe and how to pay it.
After your first year of getting the State Pension, you’ll pay tax based on 52 weeks of payments each year.
If your income is below your Personal Allowance, you usually will not need to pay tax.
If you continue to work
Your employer will usually take any tax due off your earnings and your State Pension. This is called Pay As You Earn (PAYE).
If you’re self-employed you must fill in a Self Assessment tax return at the end of the tax year. You must declare your overall income, including the State Pension and money from private pensions, for example your workplace pension.
If you have other income
You’re responsible for paying any tax you owe on income other than money from your pensions. You might have to fill in a Self Assessment tax return.
If you owe any tax on investment income, HMRC will send you a calculation telling you how much you owe and how to pay it.
Tax codes
If your income only comes from one source you’ll usually have one tax code.
You can have several tax codes if you have income from more than one source.
You can get your tax code corrected if you think it’s wrong.
FAQs
Taxes on Pension Income
How much will my pension be taxed? ›
Pensions: Pension payments are generally fully taxable as ordinary income unless you made after-tax contributions. Interest-Bearing Accounts: Interest payments are taxed at ordinary income rates, but municipal bond interest is exempt from federal tax and may be exempt from state tax.
At what age do you stop paying taxes on your pension? ›
Taxes aren't determined by age, so you will never age out of paying taxes. Basically, if you're 65 or older, you have to file a tax return in 2022 if your gross income is $14,700 or higher. If you're married filing jointly and both 65 or older, that amount is $28,700.
Do pension funds pay taxes? ›
Typically, pension funds don't have to pay capital gains taxes. Because pension funds are exempt from paying capital gains taxes, assets in the funds can grow faster over time. While the pension fund does not pay capital gains taxes, distributions to the employee will be taxed at the employee's ordinary income rate.
Which state doesn't tax pensions? ›
Eight of them – Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming – don't tax wages, salaries, dividends, interest or any sort of income. New Hampshire, the ninth state, has no state income tax on wages, salaries, retirement account withdrawals or pension payments.
How can I avoid federal tax on my pension? ›
To avoid the tax hit completely on your lump sum retirement distribution, it is advisable that you contact your investment representative, banker or new employer's retirement administrator before you agree to receive your pension distribution. Establish a rollover IRA account with your investment broker or banker.
Do pensions count as earned income? ›
Minimum retirement age generally is the earliest age at which you could have received a pension or annuity if you were not disabled. Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension and are not considered earned income.
How much federal tax should I withhold from my monthly pension? ›
A payer must withhold 20% of an eligible rollover distribution unless the payee elected to have the distribution paid in a direct rollover to an eligible retirement plan, including an IRA.
How much will my Social Security be reduced if I have a pension? ›
How much will my Social Security benefits be reduced? We'll reduce your Social Security benefits by two- thirds of your government pension. For example, if you get a monthly civil service pension of $3,000, two-thirds of that, or $2,000, must be deducted from your Social Security benefits.
Do you pay federal taxes on Social Security and pensions? ›
About 40% of people who get Social Security must pay federal income taxes on their benefits. This usually happens if you have other substantial income in addition to your benefits.
Taxes on Pension Income
You may owe federal income tax at your regular rate as you receive the money from pension annuities and periodic pension payments. But if you take a direct lump-sum payout from your pension instead, you must pay the total tax due when you file your return for the year you receive the money.
Does pension count as tax? ›
Only the money you actually take out of your pension is counted as income or capital, not the full amount that you're entitled to take.
At what age is Social Security no longer taxed? ›
Key Takeaways. Social Security benefits may or may not be taxed after 62, depending on your other income earned. If you only receive Social Security benefits and no other income, then you likely won't pay federal income taxes. In 2024, ten states tax Social Security benefits in some manner.
How much are pensions taxed federally? ›
Lump-Sum Benefits
A mandatory 20% federal tax withholding rate is applied to certain lump-sum paid benefits, such as the Basic Death Benefit, Retired Death Benefit, Option 1 balance, and Temporary Annuity balance.
Where can I retire on $2000 a month in the United States? ›
10 Places to Retire for $2,000 Per Month or Less
- Uniontown, Pennsylvania.
- Cedar Rapids, Iowa.
- Freeport, Illinois.
- Lincoln, Nebraska.
Delaware (1), West Virginia (2), Georgia (3), South Carolina (4) and Missouri (5) are the top five states for retirement in 2024. Alaska (50), New York (49), Washington (48), California (47), and North Dakota (46) landed at the bottom of the rankings for the best and worst states to retire.
Do I pay Social Security tax on my pension? ›
Pension payments, annuities, and the interest or dividends from your savings and investments are not earnings for Social Security purposes. You may need to pay income tax, but you do not pay Social Security taxes.
What is the IRS general rule for pensions and annuities? ›
The amount of each payment that is more than the part that represents your net cost is taxable. Under the General Rule, the part of each annuity payment that represents your net cost is in the same proportion that your investment in the contract is to your expected return.
