With the Government seeing fit to make HM Revenue and Customs a payer of benefits (pension credit etc.) as well as a collector of taxes, it is no wonder that people are becoming confused as to which sources of income are taxable and which are not. It is particularly confusing for pensioners, who receive pensions, annuity income and various sorts of investment income.

Here is a short guide on what income is taxable and what income is not. Whilst it covers the most usual sources of income, it is not a complete list.

Taxable

• Occupational Pensions (Normally tax will be deducted under PAYE for this unless you are resident abroad);
• The State Retirement Pension (Tax is never deducted from this). The earnings-related element of the state pension is also taxable;
• Interest earned on bank, building society etc. accounts unless your with non-savings income exceeds £16,500 above £5,000. Where this income is less,  up to £5,000 of savings income is taxed at 0%). The taxable amount increases as non-savings income increases);
• Income from employment;
• Personal pension income (excluding the capital element);
• Debenture interest and interest received on government stocks or bonds;
• Dividends (from 6 April 2016 the first £5,000 of dividend income is not taxable)
• Profits on any trade or profession; and
• Rental income, net of allowable expenses.

Not taxable

• The capital element of an annuity or pension. Annuities have two elements. The capital element is, in effect, a return of part of the sum invested. The income element is, in effect, interest on the sum invested. Only the latter is taxable. The insurance company administering the annuity should issue a tax certificate showing the taxable amount annually;
• Attendance Allowance;
• Premium Bond winnings;
• Interest and dividends received within ISAs;
• Pension credits;
• Profits from gambling;
• Income from renting a room covered by ‘rent a room’ relief;
• Interest earned on National Savings Certificates; and
• Child Allowance and Child Tax Credit.

There are many other benefits, both means-tested and not means-tested. Some are taxable and some are not. If you receive a benefit and are not sure whether it is taxable or not, consult HM Revenue and Customs..

There are also quite complex rules in some cases (especially as relates to rental income) as to how the taxable amount is calculated, so just knowing that something is or is not taxable is often of little use in knowing what figure to put on the tax return.

Following changes to the pensions regime which came in in 2015, the taxation of pensions has become considerably more complex, although the taking of 25% of the pension fund as a lump-sum is tax-free.

Many pensioners do not receive tax returns and therefore have no way of knowing whether they are paying too much or too little in income tax. However, the responsibility for making sure that the tax paid is correct lies completely with the taxpayer under the self-assessment system. If you have any doubts as to whether your tax affairs are correct or not, contact us.

Source: Tax and Financial Planning