There are two stages in your pensions lifespan; the contribution stage, when you are working and paying into your pension fund, and the payments stage, when you are receiving payments after retirement. This guide aims to help you understand when income tax on pensions is payable and where pension tax relief is available.
Tax on Pension Contributions
Lots of money and time is spent encouraging us to take out pensions and save for our retirements, and one of the incentives offered is the tax relief available. Paying into a pension scheme means that you pay a lower income tax bill, but the system works differently depending upon the type of scheme you pay into.
Follow this link to Tax on Pension Contributions to read more
Tax on Pension Payments
When you reach retirement, you will start to draw on you hard earned pension fund, and it will be taxed as income, in just the same way as your wages were taxed through your working life (although you won't pay National Insurance Contributions). The rate at which you pay income tax on pensions will depend upon your taxable income, and it is important that you remember that this is ALL taxable income, not just your pension.
Follow this link to Tax on Pension Payments to read more
Tax on Pension Lump Sum Payment
As part of your pension plan, it is likely that a lump sum is payable in addition to your regular pension, which is tax-free. The total lump-sum you are entitled to will depend upon the terms and conditions of your pension scheme, but can be up to 25 per cent of your total savings balance.
In some cases, where the total pension fund is low, you may be able to withdraw all your pension fund as one lump sum. This is called trivial commutation, and is subject to income tax.
Follow the link to pension lump sums for more details