I need to pay earnings tax on my two tiny personal pensions: What do I must do? HEATHER ROGERS replies

This may seem rather naive, but I have never had to question this before. I have just reached 66 and become a state pensioner.

The state pension means I am below the personal allowance. However, I also have two tiny workplace pensions, which will take me above it.

How, then, do I pay tax? Do I get sent a bill? Once a year? More than once?

Heather Rogers replies: It is not naive at all to think ahead and ask about this matter. 

This is a very frequently asked question, and one that has become more and more relevant as the personal allowance has remained unchanged at £12,570 since 2021/22.

That was the last tax year in which we, as taxpayers, benefited from an increase in the allowance. I will explain the position below and then deal with your specific circumstances.

Why are more pensioners being pulled into income tax?

This is because the state pension is increasing but the personal allowance of £12,570 has stayed frozen.

The personal allowance means you can earn £12,570 in income without paying tax.

The full state pension is rapidly approaching this figure, meaning even taxpayers with very small amounts of income in addition to their state pension are finding themselves having to pay tax.

Some people already receive a big enough state pension for this to breach the personal allowance on its own. 

This might be because they deferred drawing it and therefore get higher than usual payments, or they qualified for now abolished earnings-related top-ups in the past.

How much is the state pension?

For those who reached retirement before April 2016, they receive the basic state pension which in 2025/26 is £176.45 and required 30 qualifying years for the maximum.

Some people may receive some or even significantly more than that if they paid into the now defunct SERPS or second state pension.

If you reach retirement after April 2016, you will receive the new state pension. The full rate for 2025/26 is £230.25 per week. You need at least 35 years’ contributions to receive the maximum.

This equates to just under £12,000, leaving very little of the £12,570 personal allowance available to offset against other income, meaning many pensioners with small private pensions are being caught with tax liabilities.

And as explained above, some people’s annual state pension is already higher than the personal allowance so they pay income tax too.

What to do if your pension income exceeds £12,570

HMRC will issue you will a tax code if you have taxed earnings under PAYE, whether a private pension or a small pension from employment, and endeavour to collect the underpayment.

HMRC will most likely send you a Simple Tax Calculation after the end of the tax year.

If you have bank interest, HMRC usually has to wait until it has received notification from the banks as to the amount you have been paid.

If your earnings permit and the amount is small then they may collect any underpayment through your tax code for the following year, or they may raise a bill.

If you are worried you have not received a Simple Tax Calculation when you expected to do so, you can check up online in your personal tax account.

If you have set this up, your simple assessment letter and any code codes will appear in it. If you wish to set one up and haven’t done so, you can check your tax position without waiting for the letter to arrive.

You need a passport or driving licence, NI number and details about your income. If you have a P60 from employment or a private pension have it to hand.

Set up a personal tax account here.

How do you pay the tax owed?

If HMRC cannot collect through your code, then for tax demands sent by Simple Assessment you can pay as follows.

If you get a Simple Assessment letter:

– Before 31 October 2025 (for the 6 April 2024 to 5 April 2025 tax year) – you must pay what you owe by 31 January 2026

– On or after 31 October 2025 (for the 6 April 2024 to 5 April 2025 or any earlier tax year) – you must pay what you owe within three months of the date on the letter

Always check the Simple Assessment tax letter against your own records to ensure it is correct.

If you have enough other income which is taxed at source and the amount you owe is less than £3,000, HMRC will endeavour to collect it through your tax code for the next tax year. This will be stated on the letter, but you can pay upfront yourself if you prefer.

Make the most of your other tax allowances

Bank interest allowance: If you are a lower rate taxpayer, then you can earn up to £1,000 (£500 for higher rate) on bank or investment interest tax free

Savings allowance: If your income from earnings (non- investment) is less than £12,570, then you receive a £5,000 starting rate for savings on top.

If you earn more than £12,570 but less than £17,570 from other earnings, the earnings exceeding £12,570 will be deducted from the £5,000 starting rate for savings until at £17,570 it is no longer available.

Dividend allowance: You have a £500 dividend tax free allowance as well

Marriage allowance: If you are married, check and see if you are eligible for the marriage allowance. All the following need to apply:

– You’re married or in a civil partnership and you were both born on or after 6 April 1935

– You do not pay income tax or your income is below your personal allowance (usually £12,570)

– Your partner pays income tax at the basic rate, which usually means their income is between £12,571 and £50,270 before they receive Marriage Allowance.

If you claim the marriage allowance, then you can transfer up to £1,260 of your unused personal allowance to your spouse or civil partner. This is the amount of personal allowance that exceeds your income.

This reduces the tax liability of the taxpaying partner by up to £252 in the tax year (6 April to 5 April the next year).

Please note in Scotland the rules are slightly different.

Married couple’s allowance: This could reduce your tax bill by between £436 and £1,127 a year but is only available if one of you was born before 6 April 1935

You can claim married couple’s allowance if all the following apply:

– You’re married or in a civil partnership

– You’re living with your spouse or civil partner

– One of you was born before 6 April 1935

For marriages before 5 December 2005, the husband’s income is used to work out Married Couple’s Allowance. For marriage and civil partnerships after this date, it’s the income of the highest earner.

What if your state pension is your only income?

From 2027/28, if the recipient’s only income is the state pension, then the Government has advised that for this parliament, tax will be not be collected on any state pension that exceeds the £12,570 personal allowance.

More details on how this will work and who will be eligible are due to be released soon.

How will your state pension and two private pensions be taxed?

In your circumstances, HMRC will deduct the state pension from your personal allowance.

The remaining unused personal allowance will be applied to one or more of your private pensions depending on the amount of personal allowance remaining and the amount you earn from your private pensions.

The balance of private pension not covered by the personal allowance will be taxed.

You will probably receive a Simple Assessment letter at some point after the end of the tax year.

If there is an underpayment, HMRC will collect the tax either by payment as described above, or if it is small may collect through your tax code for the following year.

Just make sure you check any figures in the Simple Assessment letter and query any discrepancies with HMRC.