Tax on your benefits
Your pension income is taxable
Your pension income is normally treated as earned income for income tax purposes, but you don’t pay National Insurance contributions on it. When you come to start taking your benefits, you can normally choose to take up to a quarter of the value as tax-free cash. This will reduce your pension income.
The tax you pay depends on your total taxable income
The amount of income tax that you pay on your pension income depends on the total taxable income you receive – from the Fund and from other sources, including the State Pension. If your total taxable income (known as ‘gross income’) is less than your personal tax allowance, you won’t pay any income tax. To give you an idea, the standard personal allowance for the tax year 2020-21 is £12,500.
If your gross income is more than your personal allowance, you are liable to pay income tax on the amount that is over your personal allowance. Different rates of income tax apply depending on the type of income and how much it is. The government will give you a tax code, which shows how your income should be taxed. When you get your pension income from the Fund, we will normally use your code to deduct tax before paying the rest to you. Most pension schemes work in a similar way.