Tax Credits: Pension income
Pension income for tax credits mirrors the tax treatment.
It includes the following taxable pension payments and annuities:
- income from UK social security pensions, ie the state retirement pension, graduated retirement benefit, industrial death benefit, widowed mother’s allowance, widowed parent’s allowance, and widow’s pension (ITEPA 2003, section 577);
- former colonial pensions now paid under the Overseas Pensions Act 1973 (ITEPA 2003, section 629);
- taxable UK pensions other than social security pensions, most payments from registered schemes and retirement annuities (ITEPA 2003, section 569);
- voluntary annual payments made by a former employer (ITEPA 2003, section 633);
- any pension under a registered pension scheme (ITEPA 2003, section 579A);
- any unauthorised member payments under such a scheme (FA 2004, section 208(2)(a), (b));
- any periodical payment granted out of the House of Commons Members’ Fund or sums derived from that fund (ITEPA 2003, section 619);
- any annuity paid under a retirement annuity contract (ITEPA 2003, Pt 9, Ch 9);
- annuities for the benefit of dependants, annuities under non-registered occupational schemes and annuities in recognition of another’s services (ITEPA 2003, sections 609, 610 and 611);
- any social security pension lump sum under F(No 2)A 2005, section 7;
- trivial commutation and winding-up lump sums and death benefits under ITEPA 2003, section 636B and 636C.
In calculating pension income for tax credits, the following are disregarded:
- a wounds pension or disability pension paid to members of the armed forces (ITEPA 2003, section 641);
- an annuity or additional pensions payable to the holder of an award for bravery e.g. Victoria Cross (ITEPA 2003, section 638);
- a pension in respect of death due to military or war service (ITEPA 2003, section 639), together with any pension or allowance by reason of which such a death pension is abated or withheld (ITEPA 2003, section 640);
- a mobility supplement, or constant attendance allowance, paid with a war pension;
- that part of a pension awarded at the supplementary rate under Article 27(3) of the Personal Injuries (Civilians) Scheme 1983 which is specified in paragraph 1(c) of Schedule 4 to the Scheme;
- the exempt amount of a pension awarded on retirement through disability caused by injury on duty or by a work-related illness as calculated in accordance with ITEPA 2003, section 644(3);
- the tax-exempt part of a lump sum paid under a registered pension scheme (ITEPA 2003, section 636A);
- coal or smokeless fuel, or allowances in lieu of coal, given or paid to former colliery workers or their widows or widowers, to the extent that it is exempt from income tax under ITEPA 2003, section 646(1).
Donations to charity under the payroll deduction scheme (ITEPA 2003, section 713) may be deducted from any pension payment.
Pension withdrawal flexibilities
From April 2015, individuals aged 55 or over will have more flexibility around when and how they can make withdrawals from their pensions funds.
The changes bring more choice about how to use or spend the pot of money accrued in a pension fund but there are no changes to the way income from pensions is taxed and no change in how pension income affects tax credits or other social security benefits.
For this reason it is important that claimants who find themselves in the position where they are making decisions about whether and how to use their pension fund in light of the new flexibilities should not overlook the implications for their tax credit awards, benefits and overall household income.
The tax-free element of pension withdrawal is ignored as income for tax credit purposes but any amount over that limit should be declared as pension income in the usual way, as with interest on savings and investments. Both are classed as ‘other income’ and the total amount of ‘other income’ (which also includes foreign, property and notional income) which is over £300 is taken into account in assessing income for tax credit purposes.
Tax credit awards are assessed against income from the previous year as well as the current year and increases and decreases up to £2,500 are disregarded in the comparison between current year and previous year (see our understanding the disregards section). So a modest taxable pension income in current year (within the £2,500 increase disregard) shouldn’t affect the tax credit award that year, although it may impact on the amount of tax credits the following year.
Last reviewed/updated 1 July 2022