Pension Tax

By: EconomyWatch   Date: 23 September 2009

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A pension tax is the taxable component in a pension income. As unfair as it may seem, both state and private pension income may be taxed depending on the income of the individual. Some state benefits are exempt from pension tax. However, if one falls in the low income bracket, he or she need not pay any pension tax.

Pension tax offers flexibility in the time chosen and methods used by an individual to save for his/her pension. He/she can pay more towards retirement, while gaining some tax advantages.

Pension Tax in the UK: Tax Relief

One can enjoy tax relief on contributions of up to 100% of his/her UK earnings, if he/she is a UK taxpayer. The basic tax relief from the HM Revenue and Customs (HMRC) is at 20%. For every ₤100 an individual contributes, ₤125 is added to his/her pension fund. This is because the figure represents 80% of the total he/she has earned, before taxes. The pension provider thus claims ₤25 for him/her.

The amount of pension contribution that qualifies for tax relief depends on the earnings of the individual. If the earnings are less than £3,600 in any year, he/she may need to pay up to £2,880 in a tax year. When basic-rate tax relief is added, this becomes £3,600 - the maximum he/she can pay and receive tax relief on. If he/she earns £3,600 or more in any year, he/she can contribute an amount equal to 100% of his/her earnings and still get income tax relief, as long as the amount is not more than the annual allowance, which is set every year by HMRC.

The limit on pension tax relief for the tax year 2009-2010 is ₤245,000 and for the year 2008-2009, it was ₤235,000.

There are other tax advantages like:

·        Pension fund growth

·        Exempted from capital gains tax

·        Withdrawing funds as a retirement lump sum

Pension Tax in the USA: Tax Relief

If one receives pension payments or annuity payments, pension tax can be applied partially or fully. One must report the taxable amount on his/her tax returns.

Pension or annuity payments are taxable on tax return if the employer has contributed the complete cost of the pension or annuity plan, or in case the employee has received all his/her contributions back tax free in preceding tax years.

If the contribution to the pension or annuity is made using after tax dollars, then the pension or annuity payments are partially taxable on tax return. A person is not liable to pay tax on the tax return on pension or annuity payments that are your own after tax dollars being returned.


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