State pensioners are being left “baffled” by letters from HMRC. One pensioner wrote to Tom Selby, an expert at AJ Bell, explaining they received “a notification” from HMRC for the upcoming tax year.
The letter has “caused some confusion as it indicates that the state pension is taxable”, the pensioner continued in a letter to the I paper: “I have always thought that the state pension was not taxable.”
The pensioner explained that the letter states the state pension income ‘is taxable, but tax is not taken off the payments before they are paid to you’. Mr Selby kindly stepped in to clarify the rules surrounding the state pension.
He stated: “In terms of taxation, your state pension does count towards your income for income tax purposes but is not directly taxed. In the jargon, you might be told that the payment is made ‘net of tax’, which simply means without any income tax being deducted.
“It’s probably easiest to illustrate how this works with an example. Consider someone who hasn’t accumulated a 35-year National Insurance record necessary to receive the full state pension amount and so is entitled to a reduced state pension worth £9,000 per year.”
“No tax will be deducted from this income directly, but it will still consume £9,000 of their personal allowance (below which the income tax rate is 0 per cent), which in 2024/25 is set at £12,570.”
Your State Pension income is considered taxable earnings. However, it’s paid without any tax deductions. This implies that your private pension provider usually pays any Income Tax you owe, reducing your other pension income before you receive it ,reports Birmingham Live.
Your tax code informs your provider about the tax you must pay.
For instance, if you receive £5,000 annually from your private pension and £11,500 from the State Pension, your private pension provider will typically pay any tax you owe on the total £16,500 you receive.
If you don’t have other income sources and earn enough to be liable for tax, you’ll need to settle any tax yourself.
