With the Government seeing fit to make HM Revenue and Customs a payer of benefits (pension credit etc.) as well as a collector of taxes, it is no wonder that people are becoming confused as to which sources of income are taxable and which are not. It is particularly confusing for pensioners, who receive pensions, annuity income and various sorts of investment income.
Here is a short guide on what income is taxable and what income is not. Whilst it covers the most usual sources of income, it is not a complete list.
- Occupational Pensions (Normally tax will be deducted under PAYE for this unless you are resident abroad);
- The State Retirement Pension (Tax is never deducted from this). The earnings-related element of the state pension is also taxable;
- Interest earned on bank, building society etc. accounts (the first £1,000 is not taxable from 6 April 2016 for taxpayers wich non-savings income above £5,000. Where this income is less, £5,000 of savings income is taxed at 0%);
- Income from employment;
- Personal pension income (excluding the capital element);
- Debenture interest and interest received on government stocks or bonds;
- Dividends (from 6 April 2016 the first £5,000 of dividend income is not taxable)
- Profits on any trade or profession; and
- Rental income, net of allowable expenses.
- The capital element of an annuity or pension. Annuities have two elements. The capital element is, in effect, a return of part of the sum invested. The income element is, in effect, interest on the sum invested. Only the latter is taxable. The insurance company administering the annuity should issue a tax certificate showing the taxable amount annually;
- Attendance Allowance;
- Premium Bond winnings;
- Interest and dividends received within ISAs;
- Pension credits;
- Profits from gambling;
- Income from renting a room covered by 'rent a room' relief;
- Interest earned on National Savings Certificates; and
- Child Allowance and Child Tax Credit.
There are many other benefits, both means-tested and not means-tested. Some are taxable and some are not. If you receive a benefit and are not sure whether it is taxable or not, consult your local HM Revenue and Customs office.
There are also quite complex rules in some cases (especially as relates to rental income) as to how the taxable amount is calculated, so just knowing that something is or is not taxable is often of little use in knowing what figure to put on the tax return.
Following chnages to the pensions regime which came in in 2015, the taxation of pensions has become considerably more complex, althoguh the takign of 25% of the pension fund as a lump-sum is tax-free.
If you were an employee before you retired, the tax office dealing with your affairs will often be that which dealt with you as an employee. There is an exception that some pensions schemes (especially those of large employers) are dealt with by specialist units at different tax offices. if you have any doubt as to which tax office you should deal with, your local tax office should be able to advise you if you can supply your full name, date of birth and National insurance number.
Many pensioners do not receive tax returns and therefore have no way of knowing whether they are paying too much or too little in income tax. However, the responsibility for making sure that the tax paid is correct lies completely with the taxpayer under the self-assessment system. If you have any doubts as to whether your tax affairs are correct or not, contact us.