HMRC explains tax rules for state pension as ‘you will only pay’ in this situation
A taxpayer had a question about moving their money around and investing some of it in Premium Bonds.
HRMC has clarified how tax applies to state pensioners after a query from a couple.
A taxpayer got in touch with the tax authority over X to ask about tax allowances and the state pension.
They explained that their wife had recently had tax deducted from a private pension payment.
The person said: "She has applied for the marriage allowance to be allocated back to her. (April 2025) How can we prevent further tax bills when accessing private pension and/or other saving schemes?"
The marriage allowance allows a spouse or civil partner to transfer some of their personal allowance to their partner, if their income is beneath the £12,570 personal allowance.
The person posed some further questions for HMRC, asking: "If money was removed from the private pension of either individual to be invested elsewhere, e.g. Premium Bonds, what rules are there regarding tax demands?
"Take out £10,000, pay 20 percent reinvest and pay 20 percent again on any dividends. It seems the tax is applied multiple times."
The state pensioner said they had tried contacting their financial advisor about the issue but to no avail.
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They explained: "Our financial advisor is not helping because if the private pensions are closed, he stops getting a fee. But the lump sum is not returning enough to leave it where it is."
HMRC responded to set out the rules. The group said: "You only pay income tax if your taxable income - including your private pension and state pension - is more than your tax-free allowances (the amount of income you’re allowed before you pay tax).
"Further details about dividend tax and rates can be found at this link." They included a link to a webpage with information about tax on dividends.
The tax-free allowance for income from dividends is £500 for the current tax year.
Income above the allowance is taxed at 8.75 percent for basic rate income tax taxpayers.
Those on the higher rate pay 33.75 percent tax on dividend income while those on the additional rate pay 39.35 percent.
