Thousands of Britons are choosing to work past the State Pension age. However, if you plan to keep earning a salary while claiming your pension, HM Revenue & Customs (HMRC) has one crucial rule you need to understand to avoid any unexpected bills.
The Key Rule: Income Tax Still Applies
The single most important rule working pensioners must grasp is that while reaching State Pension age exempts you from paying National Insurance, it does not exempt you from Income Tax. Many people mistakenly believe their tax burden completely disappears once they hit 66. In reality, HMRC lumps all of your income streams together to calculate your tax liability. This includes your wages, your State Pension, any private pensions, and income from savings or investments.
This means that if your combined total pushes you even 1 pound over the standard tax-free Personal Allowance, which is currently frozen at 12,570 pounds a year, you must pay Income Tax on the excess amount.
How HMRC Collects the Tax
Your State Pension is always paid to you gross, meaning the government will never deduct tax directly from your pension payments. Instead, HMRC collects any tax you owe by adjusting your tax code. They will notify your employer, who will then deduct the necessary tax directly from your wages through the standard Pay As You Earn (PAYE) system. This happens automatically, but it means your take-home pay from your job might be noticeably lower once your State Pension kicks in. If you are self-employed, you do not use PAYE and must manually declare all your income sources on your annual self-assessment tax return.
Check Your Payslips
HMRC has also issued a tip for people paying taxes. On its website, it states: "If you're claiming a State Pension and are still working, keep an eye on your payslips to make sure the right amount of tax is being taken. If something looks wrong, like you think you might have paid too much National Insurance, or you're not sure if you're paying the right amount of tax, sorting things out should be simple. You can easily see what tax you've paid on GOV.UK or by using the HMRC app."
National Insurance Exemption: You Must Act
While the Income Tax rule can catch people out, the immediate halt to National Insurance (NI) deductions provides a welcome financial boost. Crucially, you must take action to get this perk, because your employer will not stop your NI deductions automatically. You must actively prove your age to your boss by presenting your birth certificate, passport, or your State Pension award letter. Once you provide this proof, they can update their payroll system and ensure you stop paying NI exactly when you should. If you are self-employed, your NI obligations will end at the start of the new tax year (April 6) following your 66th birthday. Just ensure your date of birth is accurately recorded on your tax return so HMRC can stop the charges.
Note: The State Pension age is currently 66, but is actively scheduled to rise to 67 between April 2026 and March 2028.
