how is my pension taxed?

Question

HOW DO THE INLAND REVENUE CALCULATE TAX ON MY STATE AND COMPANY PENSIONS

Answer 1

As I understand it, they estimate your Income for the year (State Pension + Private Pension (plus Share Dividends (if not in ISA) & Savings Interest etc. if it looks like you are into the 40% band)) and then calculate your Tax Code (just like when you where Employed) ...

Your Private Pension provider is advised of your Tax Code & they deduct the Tax before paying you (just like PAYE i.e. as your Employer used to).

Unless you are into 40% band, that's it.

Answer 2

they would normally issue a tax code to be applied to company pension.

for example (assuming you are over 65)

you company pension of £20000 a year.
your tax code is 728L (this is £7280 tax free a year for over 65 to 74)

you would normally be taxed on £12720 ( 20000-7280).

now if your state pension is say £5000 a year. what they do is put you state pension into your tax code. so instead of your code being 728L meaing your tax free amount of £7280, they reduce this by the £5000 so you tax free becomes £2280 and your code becomes 228L on your company pension and you would then be taxed on £17720

this way they are collecting the tax due on your state pension via the income from your company pension.

hope you can follow this.