Tax and retirement - Income on Top of Basic Pension

In 2012/13 the age allowance is £7,180 (£61.19 a week) for a single person aged sixty-five to seventy-nine. The basic retirement pension is £81.19 . So you can have £80 income a week on top of the basic retirement pension before you start paying tax. The figures for a married man where he and his wife are under eighty and one of them is sixty-five or more is £60.96. For people over eighty, the figures are £88.9 0 (single) and £68.80 (married) on top of the basic retirement pension. A single woman aged under sixty-five throughout the tax year who does not get the age allowance can only have about £8.99 a week on top of the basic pension before she starts paying tax.

If you have extra amounts on top of your basic pension, such as graduated pension, earnings related additional pension, or extra pension for postponing retirement, then obviously you can have less other income before you start paying tax. But if you still have dependent children, the extra pension you get for them is tax free.

It is possible, especially for single women under sixty-five, that the tax allowances will not be enough to cover your state pension including the graduated, additional and extra pension you may have added on to the basic pension. So you could end up paying tax on your state pension alone.

The Inland Revenue have a special procedure for dealing with this problem. Usually they will be aware, through your local tax office, that you have left work at pension age.

In most cases they will write to you enquiring about your sources of income after retirement. They will also know the date on which your state pension starts and the amount of it from a form P86 which the DWP issues to the revenue for every pension award.

If your pension seems likely to exceed your tax allowance, they will assess the tax due and ask you to pay it in four equal quarterly instalments starting thirty days after the assessment is made. If those payments will cause you any hardship, they will be prepared to allow a more frequent payment of smaller amounts. You should write to them if you want to negotiate such a deal.

You should note that the Inland Revenue ignore sums of tax due of less than £80 in a year which they say are not worth collecting. So your total income in the tax year can exceed your tax allowance by £200 (£9 .88 a week) before any tax will normally be collected. However, if you fill in a tax return for any reason, they will collect all the tax due, even if it is less than £80.

More information

Tax and retirement - More on Income on Top of Basic Pension

Sometimes a married woman can reduce her husband's tax bill by claiming her own pension on her own contribution record rather than on his. If she does this, she can then set her own pension against another tax allowance called wife's earned income allowance.
This allowance is 8609 (£80.10 a week) and it applies only to earned income and a company or state pension paid as a result of the woman's own earnings (or to a retirement or widow's pension paid on the basis of her late or ex-husband�s contributions if she has remarried).
It is in addition to her husband's age allowance. So it will mean that her own pension is tax free unless she also still earns money or has a pension from her job . . . ... see: Tax and retirement - More on Income on Top of Basic Pension