HMRC has clarified tax rules as they relate to pensions (Image: Getty)
HMRC has explained how tax on pensions works – and a circumstance in which you may be owed a refund.
A taxpayer contacted as they were planning to retire later this year and starting drawing down from their private pension, and so they were interested in how income tax is calculated on their new income stream.
In response, explained that once the person starts receiving their pension, they could contact the authority to “request the allowance is allocated to the pension”.
You can earn £12,570 a year without paying income tax on this amount, so if you have a pension as your single income stream, you would want this allowance to be allocated to your pension income.
In further explaining how the tax is calculated on the person’s regular payments from their pension, said: “The tax is deducted on your weekly/monthly payments so if the pension is over the monthly/weekly threshold tax is deducted.”
However, the tax authority went on to say that you could be owed funds: “If at the end of the year you have been overcharged tax you’ll receive a refund.”
will write to you if you are due a tax refund. You can claim this online through your personal tax account or via the app, or you can request for a cheque to be sent out to you.
Another rule to note is that your personal allowance decreases once you earn £100,000 or more a year, your personal allowance for income tax reduces.
This falls by £1 for each £2 you earn above this amount, meaing you have no tax-free allowance if you earn £125,140 or more.
You can start to draw down from your pensions when you reach the age of 55, although this is increasing to 57 from April 2028.
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Another important factor to consider when planning financially for your retirement is your .
You can start to claim this when you turn 66, although the age is increasing in stages to 67 and then to 68 over the coming years.
The full new is currently £221.20 a week although this is increasing 4.1% in April in line with the , rising to £230.25 a week.
A person typically needs 35 years of National Insurance contributions to get the full new . You can check your National Insurance record .
If you have gaps in your record, now may be a good time to pay to fill them in, as you can currently pay contributions over an extended period, as far back as the 2006/2007 tax year.
Usually you can only buy contributions as far back as six years ago. You can top up over this extended period until the end of this tax year, in April.