Tax implications of working after state pension age

DEAR JENNY,

I will reach the state pension age in 2023. I’ve built up a private pension, which I plan to draw upon in addition to my state pension, but I plan to carry on working two days per week.

What are the tax implications for working beyond state pension age? I don’t expect my total income to be any more than around £45,000.

Name and address supplied Jenny says…

You won’t be alone in continuing your employment into your mid-sixties. According to the latest data published just last week by the Office for National Statistics, more than 1.3 million people are still working past the age of 65.

And a report suggested that this was largely driven by the affordability to retire. The Institute of Fiscal Studies has found that the proportion of over 65s in work has risen much more steeply in deprived areas.

You’re right to consider the tax implications of your retirement income. They are often misunderstood and could be a critical factor in deciding how you draw an income from your pensions.

Let’s start with your state pension. When you come to claim it, it will be paid to you ‘gross’ – i.e. without tax deducted from it. Let’s say you get the full state pension of £179.60 in the 2021-22 tax year. That’s equivalent to £9,339.20 per year, paid completely free of income tax.

Everyone gets a tax-free personal allowance – the amount you can earn before you pay any income tax. This is currently £12,570.

Once you get your state pension, you’ll still have £3,230.80 remaining to offset against your employment and pension income.

Let’s say your combined income from work and pensions is £31,000. Deduct your remaining tax-free allowance and this will leave you with £27,769.20 subject to income tax at the basic rate, or an income tax bill of £5,553.84.

However, this will depend on how you draw an income from your pension. If you have a final salary or defined benefit pension, your tax affairs should be relatively straightforward, as your pension will be paid to you monthly, in a similar way to your salary.

But if you have a defined contribution pension, which accumulates into a pension ‘pot’ from which you can draw an income, the amount of tax you pay on your withdrawals will depend on how you draw them.

If, for example, you decide to take the 25 per cent tax-free lump sum you’re entitled to from your pension, all your subsequent withdrawals could potentially be liable to income tax.

But the alternative is to withdraw income from your pot in chunks without drawing on the tax-free lump sum. With these withdrawals, the first 25 per cent is tax free, with the remaining 75 per cent subject to income tax.

There is one final twist here. Pensioners have traditionally enjoyed a significant tax break in that they no longer have to make National Insurance contributions on their employment income past state pension age (and

You’re right to consider the tax implications of your retirement income.

these are not applied to pension payments). The saving is significant – National Insurance is 12 per cent on earnings between £9,568 and £50,270, and 2 per cent on anything above that amount.

However, from the 2023-24 tax year, which starts on April 6, 2023, people above the state pension age in employment will start paying a 1.25 per cent Health and Social Care levy, designed to fund some radical changes to the way that later life care is funded, as well as boosting investment in the NHS.

While it won’t be a National Insurance payment, the Government says that the levy is “payable on an amount of earnings or profits on which an employee, employer or selfemployed individual is already liable to pay a qualifying National Insurance contribution”.