HM Revenue and Customs (HMRC) has updated an online tool to help people work out how much Income Tax they may need to pay when receiving a pension.
The UK Government guidance, titled “Check if you have to pay tax on your pension”, was updated on October 5 to provide people with an estimate of their potential tax bill. HMRC said people may have to pay tax on their pension depending on their income.
The updated service will now provide an estimate showing whether someone needs to pay tax on their pension and how much they may need to pay during the current tax year.
Who could benefit from the tool
The tool could be particularly useful for people receiving income from several sources in retirement who want to get an indication of whether they are likely to face an Income Tax bill.
However, there are some restrictions on who can use it and the types of income and allowances that can be included in the calculation.
What you need to use the HMRC pension tax tool
The service estimates someone's tax position for the current tax year, which runs from April 6 to April 5. Before starting, people need to know what types of pensions they will receive, such as the State Pension or a private pension.
They will also need to provide the amount of State Pension they receive. HMRC says this can be entered as an annual, weekly or four-weekly amount. Anyone receiving a private pension will need to know how much they expect to receive from that during the tax year.
Other taxable income must also be included. HMRC gives employment income and income from savings interest as examples. People who receive or transfer Marriage Allowance will also need this information before using the service.
£12,570 Personal Allowance
The result produced by the tool is based on the person having the standard Personal Allowance of £12,570. The Personal Allowance is the amount of income someone can usually receive before they begin paying Income Tax.
The HMRC calculation also assumes that the person started receiving their State Pension after April 5, 2010. State Pension income needs to be included when considering whether someone's overall taxable income exceeds their Personal Allowance.
Someone receiving income from a private or workplace pension, employment or taxable savings interest alongside their State Pension may therefore have several sources of income to enter into the HMRC service. The result will then give them an estimate of whether tax may be due and how much they may need to pay during the tax year.
Who cannot include all their income in the tool?
HMRC makes clear that the calculator cannot take every individual circumstance into account. People cannot include any foreign income they receive when using the tool. It also cannot include Blind Person's Allowance.
The service therefore provides an estimate rather than a definitive calculation of someone's tax liability. You can use the HMRC tool on GOV.UK.
