State pension provides income in retirement but the amount it pays is relatively low when compared to employment income. Currently, the highest amount of state pension a person can receive is just over £9,000 a year which is much lower than employment income.
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According to the ONS, average regular pay before tax and other deductions for employees in the UK was estimated at £512 per week in January 2020.
That is a yearly total of nearly £27,000.
Thankfully, state pensioners will no longer need to pay national insurance but income tax could still pose a problem.
State pension payments are treated as earned income which will affect the rate of tax a person pays.
Income tax is charged on people whose income goes beyond a certain threshold.
In the current tax year, people are granted a personal allowance of £12,500 before any tax is deducted.
This threshold could easily be breached by state pension income and the tax charge could offset any positives the extra income brings.
Fortunately, the government provides a further benefit which could help retirees on particularly low incomes.
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Pension credit is an additional payment available for state pensioners who are on particularly low incomes.
The payments are split into two parts: guarantee credit and savings credit.
Single people can receive a top up of £173.75 per week on guarantee credit and up to £13.97 in savings credit so long as they’re eligible.
Coupes can receive guarantee credit payments of £265.20 per week and £15.62 per week in savings credit.
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Some people may worry that pension credit payments, just like regular state pension payments, could be hindered by income tax.
Fortunately, pension credit does not face any tax charge.
The rules around who can receive pension credits are very rigid but thankfully there are tools in place to help with eligibility queries.
The government provides a pension credit calculator which can guide people unsure of whether they qualify.
The state detail that the quickest method of applying for pension credit is by calling the dedicated phone line, although it is also possible to apply through a paper application.
Certain information will be needed to process an application.
The claimant will need:
- Their national insurance number
- Information about their income, savings and investments,
- Bank account details
It’s possible to start an application up to four months before reaching state pension age and claims can be backdated by three months.
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