Money helpdesk: Watch out for tax take when you retire

IN LAST week's Money Help Desk answer relating to higher tax allowances at age 65 ("Rebate tip for when you're no longer 64") you didn't mention the taxation of state pension. It is deducted from the higher personal allowance, thus reducing the amount of the tax allowance to an average of roughly £3,500.

SM, via e-mail

Valerie J Smart, director, PricewaterhouseCoopers Edinburgh, writes:

Many people don't realise that certain state benefits are taxable and that the taxable benefits do indeed include state pension. Unlike other work-related pensions, state pension is paid without tax being deducted at source. People who have no other sources of income will usually find that their personal allowance covers it and they have no tax to pay, but those who have a second pension, for example, have to take it into account.

As tax should be deducted at source from other pensions, this is usually dealt with by applying the personal allowance against the state pension first and only giving reduced allowances in the Notice of Coding used by the payer to tax the second pension at source.

If there is no other income where tax can be collected under the PAYE system, the personal allowance will still be applied against the state pension, which in many cases means there will be no need to file a self-assessed tax return unless asked for by HMRC. If, however, there is savings income such as bank interest where tax has been deducted at source, only the excess of allowances over the state pension can be used to cover the savings income and generate a tax repayment.