UK State Pension Bigger Than Personal Tax Allowance
Published / Last Updated on 28/01/2025
When you have company and private pension income, HMRC will issue a Tax Code to the pension schemes to ensure that the correct level of income tax in deducted. Think of your pension like your employer. They are issued with a tax code and pay you each month with income tax deducted. This is what happens with most employment pension schemes, pension annuities and regular flexi-access drawdown. This is not the case with UK State Pensions.
State Pensions form part of your taxable income and are therefore taxable but no income tax is withheld, and you receive your state pension without deduction of tax. This is because full state pensions are usually below the personal tax-free allowance, currently £12,570. HMRC then deducts your state pension from your tax code and redistributes the balance of our tax code to your company and private pensions in payment.
‘New’ State Pension From 6 April 2016
The New State Pension started and was higher than the old basic state pension. Currently, for someone with a full national insurance credits record the UK new State Pension payable is:
- Tax year 2024/25: £221.20 per week (£11,502.40 pa).
- Tax year 2025/26: £230.25 per week (£11,973 pa).
- We all accrue individual New State Pension entitlement, there is not a ‘Married Couple’s New State Pension’.
- These are both below the current personal tax allowance £12,570, so no tax payable on state pensions.
- If tax year 2026/27 increases by more than 5%, this will take the New State Pension above £12,570 meaning millions of pensioners may face a income tax bill.
- What if your new state pension is then above the personal tax threshold of £12,570?
Basic State Pension and Additional State Pension Before 6 April 2016
Before April 2016, there were two tiers of state pension.
Basic State Pension: Currently, for someone with a full national insurance credits record the Basic State Pension (sometimes called the ‘Old Age Pension’) and is currently
- Tax year 2024/25: Single person £169.50 per week and for a married couple £271.05 per week.
- Tax year 2025/26: Single person £176.45 per week and for a married couple £282.15 per week.
Additional State Pension: In the 1960s there was an extra State Pension called the Graduated Pension and then in the late 1970s, a new State Earnings Related Pension Scheme (SERPS) was introduced whereby many paid a higher level of national insurance contributions to fund a second tier State Pension, this then changed its name to the State Second Pension (S2P) and is paid out as an Additional State Pension.
- Many defined benefit/final salary company pension schemes ‘contracted out’ their employees of SERPS with employees having a rebate and paying 1.6% lower national insurance contributions, meaning greater ‘take home’ pay but no build up of Additional State Pension.
- Later in the late 1980s/1990s individuals could do the same by ‘contracting out’ but paid the usual rate of NIC (with a rebate) and the additional NIC rebate was redirected into your own private pension. This meant there was no build up of Additional State Pension but a build of then additional ‘Protected Rights’ pensions in your defined contribution (investment linked) pension.
- We know of clients that have both Basic State Pension and Additional State Pensions combined paying out at £14,000 pa, £15,000 pa and even £17,000 pa.
- What happens when your ‘old-style’ basic state pension and additional state pension are then above the personal tax threshold of £12,570?
What Happens When State Pensions are Above the Personal Tax Allowance?
Remember, New State Pension, Basic State Pension and Additional State Pension are paid without deduction of income tax, but tax is payable if you exceed £12,570 pa.
- At the end of the tax year, HMRC will complete a “Simple Assessment”.
- They then send you a tax bill for payment of income tax on excess ‘state pensions’ over the personal allowance.
- HMRC suggests there is no other way to do this currently, but we suspect that the Government will have to do something shortly to address this issue as state pensions approach and exceed the personal allowance.
