Other Benefits and Tax
Pension Credit, Housing Benefit, Council Tax Benefit, Tax Credits and Income Tax
How is extra State Pension treated for Pension Credit, Housing Benefit, Council Tax Benefit and Tax Credits?
Extra State Pension is treated in the same way as any other retirement income in these benefits or Tax Credits. It may, of course, earn additional savings credit in Pension Credit where your income exceeds the savings credit threshold which is currently set at the level of the basic State Pension.
How is the lump sum payment treated for Pension Credit, Housing Benefit, Council Tax Benefit and Tax Credits?
Normally, if you claim Pension Credit, Housing Benefit or Council Tax Benefit, any savings you have above certain limits will affect the amount you get. However, lump sum payments from putting off your State Pension will be ignored in calculating these benefits. If you choose a lump sum payment, you will not get less Pension Credit, Housing Benefit or Council Tax Benefit.
If you get Tax Credits for all or part of the same tax year that you start claiming State Pension and you choose a lump sum payment, it will count as a payment of income for Tax Credits purposes. However you can ask for your lump sum payment to be held back until the start of the next tax year. If you’re no longer getting Tax Credits in that later year, it will not affect your entitlement to Tax Credits.
What if I claim any of these benefits or Tax Credits while I’m putting off my State Pension claim?
If you claim Pension Credit while putting off claiming State Pension, your Pension Credit is calculated as if you are getting State Pension. However, if you claim Housing Benefit, Council Tax Benefit or Tax Credits, any State Pension you put off claiming will be ignored when calculating these benefits.
How are extra State Pension and the lump sum payment treated for tax?
State Pension is counted as income for tax purposes. Extra State Pension is taxable in the same way as normal State Pension. Your lump sum is taxed at the highest tax rate that applies to your other income. This will help make sure that the lump-sum payment will not push you into a higher tax bracket. For example, if the highest rate of tax applicable to your other income is 20%, your lump sum will be taxed at 20% rather than being counted with your other income which might take you into the 40% tax band.
If you choose a lump sum, you will be asked to complete a simple statement so that tax can be deducted from your payment before it is paid to you. The tax office check the amount at the end of the tax year. They repay any amount due to you if you have paid too much tax or ask you to make up the difference if you have paid too little.
You can choose to take the lump sum when you claim your State Pension or in the following tax year. This is likely to help if your income falls after you have claimed State Pension, for example because you no longer work. However, the tax effects will depend on your particular circumstances. Contact your tax office if you have specific tax enquiries.