How tax on UK state pension works – and why ‘all of it’ might not be taxed

Pension: Expert discusses state pension tax

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During the Q&A segment one viewer asked: “Are we taxed on state pension?” James explained: “You are taxed on state pension.

James explained: “You are taxed on state pension.

“You are assessable to quite a lot of your income, quite a lot of time, for quite a lot of your life.

“Most of your income in your life, your assessable to UK income tax but there are allowances.

“So currently we are all enjoying this allowance as employees in the workplace because the first £12,570 we earn is not taxed so your state pension is currently expected to be £9,339 or something in that region, so that falls below the £12,570.

“So, if you retired tomorrow and just drew your state pension it would all be tax-free because of that allowance.”

However, he does explain that with the industry living standard requirements, income will probably be more than £12,570 for many.

So many Britons may need a personal pension or a workplace pension to top up the state pension the maximum may not be enough.

People may want to top it up, so it meets their income needs in retirement, however part of the money will be taxed, and this is the amount over the allowance.

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James continued: “Some if it might be [taxed] or all of it might not be, depending on how much other income you draw at that time.

“That’s the whole point of flexi access drawdown in retirement, you can determine how much a tax you pay.

“You could do a whole year by drawing nothing from your pensions between the fifth and the sixth of April and then you have the fifth and sixth of April in any 12-month period in order to be tax efficient in other areas of your taxation life.”

The full new state pension for this tax year is £179.60 per week which is up to £9,339 a year.

This can be a helpful starting point for people’s retirement income.
To have a qualifying year towards a full state pension, one must be making £120 a week which amounts to £6,240 a year.

Additionally, one needs to have made 35 years’ worth of National Insurance contributions to get the full amount – although this may differ for those who are contracted out.

The state pension is something that one can claim once they reach state pension age – which has been rising in recent years.

It recently turned 66, but further changes are ahead.

With the state pension triple lock suspended for the 2022/23 tax year, the rate of state pension will go up by by the higher of three figures, inflation, 2.5 percent, or average earnings growth.

July’s inflation figure was down from 2.5 percent in June, which represented the highest annual inflation rate for almost three years.

But on Wednesday that all changed as the inflation rose to 3.2 percent for August 2021, a record-breaking rate.

However, due to earnings growth rising to unusually high levels in the economic aftermath of the COVID-19 pandemic, the increase to state pension for next year under the triple lock would have been much larger than normal.

Therefore, the Government decided to suspend the average earnings element of the triple lock for the 2022/23 tax year, which would have seen state pension rise by eight percent or more.

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