Are pensions taxable?

Rachael Oku

by , Writer

15 Mar 2018 /  

15
Mar 2018

Are pensions taxable?

You’ve spent your whole adult life working hard so it stands to reason that you’ll want to keep as much of your savings as possible. Pensions are one of the most tax-efficient ways to save for the future, but once you retire and start drawing your pension what was once a blessing could become a curse if you’re not sensible. Here’s everything you need to know about tax and your pension. Let’s kick things off by looking at the tax facts around contributions.

Pension contributions

The amount you decide to contribute towards your pension will depend on how much you can afford and what you think you’ll need to enjoy a comfortable retirement.

Every year you’re allowed to save up to 100% of your salary into your pension, to a maximum of £40,000 and receive tax relief on your personal contribution. This means you can make personal contributions, receive payments from your employer through auto-enrolment and get tax relief up to a total £40,000.

If you earn less than £3,600, or you don’t earn anything at all, you’re still allowed to save into your pension, to a maximum of 100% of your salary. That means you can save up to £3,600 plus a 25% tax top up.

Should you decide to save more into your pension you’ll have to pay an ‘annual allowance charge’, which is a tax on the amount you go over by. If you haven’t started planning your retirement yet there are several online tools and pension calculators that can help you determine how much you should be saving.

Tax relief on personal pension contributions

One of the best things about saving into a pension is the tax relief you get on your contributions. All UK tax payers automatically receive a 25% tax top up, but if you pay more income tax, at a rate of 40% or 45%, it’s possible to claim more. Higher rate taxpayers can claim a further 20% through their tax returns, and top rate taxpayers can claim an additional 25%.

If you’re a basic rate taxpayer and you pay £8,000 into your pension fund, HMRC will add £2,000 in tax relief, making £10,000 in total. So for every £4 you invest, the government effectively adds £1 as a tax top up.

Tax relief on employer pension contributions

While personal pension contributions are eligible for tax relief, employer contributions aren’t typically, as they tend to be deducted from your gross salary before income tax is charged. You can find out more by checking the details of your scheme, speaking to your HR department or contacting your pension provider.

Claiming tax relief with PensionBee

Whenever you make a personal contribution to your PensionBee pension, we’ll liaise with HMRC for you and claim the basic tax relief on your behalf. Simply log into your BeeHive and you’ll see your balance updated around the end of each month.

Pension withdrawal

Another area where tax can impact is on pension withdrawals. Changes made to the law in 2015 mean that you can access your personal pension from the age of 55. It’s yours to do with as you please, although it’s important to remember that your pension needs to last you for the duration of your retirement and not just the immediate future.

There are several things you can do with your pension fund, from withdrawing the full amount to keeping it invested until you need it.

Drawdown lets you keep your pension money actively invested with the option of withdrawing cash at any time. As long as there’s money available, you’ll get to determine how much you take and how often you take it. You can also withdraw money to buy an annuity, which will guarantee a fixed income for the rest of your life.

Is pension income taxable?

However you decide to access your pension fund, you can withdraw the first 25% tax-free. It doesn’t matter how large your pot is or what you plan to do with the money. Any withdrawals over the 25% threshold will be subject to income tax.

Will pension lump sums be taxed?

It’s not uncommon for those nearing or in retirement to take the first 25% of their pension as a lump sum as this amount is tax-free. The other 75% of your pension is subject to income tax whether you take it as a lump sum or in smaller amounts.

As your pension is viewed in the same way as any other income you receive, HMRC will charge your usual rate of 20%, 40% or 45% income tax, once you’ve used your tax-free allowance (£11,850 from 6 April 2018).

If you’re still working, or are receiving other income you may want to consider the timing and size of each lump sum withdrawal, as it could push you into a higher tax bracket. Find out more about pensions tax in our handy tax guide.

Managing your pension tax with PensionBee

When you choose PensionBee to manage your pension we’ll take care of the tax for you. It’s easy to make a withdrawal through your BeeHive, your online dashboard, and we’ll tell you how much tax you’ll need to pay upfront.

Every time you make a withdrawal we’ll use Pay As You Earn (PAYE) to deduct the tax you need to pay, before releasing your funds to your bank account. Find out more about drawdown from PensionBee today.

Manage your pension from the palm of your hand

Sign up to PensionBee and we’ll combine your old pensions into a new plan that you can manage online.

Sign up now

Capital at risk

PensionBee product shot PensionBee product shot

Manage your pension from the palm of your hand

Sign up to PensionBee and we’ll combine your old pensions into a new plan that you can manage online.

Sign up now

Capital at risk

PensionBee product shot PensionBee product shot

Have a question? Call our UK team 020 3457 8444

Have a question?

Call our UK team

020 3457 8444

Monday-Wednesday 9:30am-6pm, Thursday-Friday 9:30am-5pm

Monday-Wednesday 9:30am-6pm
Thursday-Friday 9:30am-5pm