Tax on occupational pensions

[naomi24]

Are occupational pensions automatically taxed regardless of the recipient's total income?

[kags]

Normally the pension would have a tax code operated on it, and this code would take into account any other untaxed income such as state pension. The amount of tax deducted would therefore be in accordance with the current tax rates applicable to collect the correct amount of tax overall.
Purchased Life Annuities are normally taxed at the savings rate of tax, leaving the tax payer to reclaim overpaid tax or pay any extra due.

[mrs_overall]

One of my brothers has an occupational pension (police) which has always been taxed. He then started a part time job in a shop three years ago and pays tax on his salary as well. He's just received a monstrous bill from the Inland Revenue as they said he wasn't paying enough tax on his pension. He argued that it wasn't his fault but having looked into it, it seems that although the tax laws are baffling they say he should have known how much tax he should have been paying. He can't afford to pay this tax bill as he's just gone through a messy divorce. The IR say it has to be paid within 12 months and are deducting it from his wages.

[naomi24]

kags, I'm really talking about people who have only a state pension as additional income. Someone told me that occupational pensions are taxed even if the person's total income doesn't amount to the minimum allowed before tax rules kick in. Is that true?

[kags]

no - if, for example your state pension was �4000 a year, then the amount of your personal allowances available to be set against your occupational pension would simply be reduced by �4000. In the current tax year, a person aged 65 - 74 can earn �7550 without paying tax, so if your occupational pension was �3550 or less, then no tax would be deducted. Anything above that amount would be taxed at the 10% band, then the 22% band and so on.
Occupational pensions are treated like any other earned income for tax purposes in this particular respect.

[naomi24]

Kags, thank you very much indeed. My aunt was really worried about it.