Pension Income And National Insurance: What's The Deal?

National Insurance is a type of tax deducted from your earnings, whether you are employed or self-employed. You start paying contributions from the age of 16 and when you're earning above a certain threshold to ensure you can get the state pension when you retire. But do you have to pay National Insurance on your pension income? This is a question many people ask, especially those with private pensions.

National Insurance is not paid on pension income

National Insurance is a type of tax that is deducted from your earnings. This is applicable to both salaries and self-employment profits. However, you do not need to pay National Insurance on your pension income. This means that once you start receiving your pension, you won't have to worry about National Insurance contributions.

National Insurance contributions are not required on any pension payments, including those from a state pension, workplace pension, or personal pension. This also includes annuity payments and any lump sums you choose to take from your pension. The rules apply even if you start receiving your pension before reaching the state pension age.

It is important to note that while you don't have to pay National Insurance on your pension, you may still be liable for income tax on your pension income. This includes private, workplace, and state pensions. The income tax treatment will depend on your individual circumstances and may change over time.

If you are still working when you reach the state pension age, you can inform your employer to stop deducting National Insurance contributions from your wages. This is typically done by providing proof of age, such as a birth certificate or passport.

It's worth mentioning that National Insurance contributions are only required on your job earnings, whether you are employed or self-employed. These contributions help increase your entitlement to key benefits, such as the state pension. The state pension age is currently 66 but will rise to 67 between 2026 and 2028.

You must pay National Insurance on job earnings

National Insurance is a tax on your earnings, whether you are employed or self-employed. It is separate from income tax and is the UK's second-biggest tax, raising just under £170 billion in 2024-25. National Insurance contributions (NICs) are paid by employees, the self-employed, and employers on the earnings of those they employ. NICs are not paid on payments from a pension.

If you are employed, you will pay Class 1 National Insurance. The amount you pay depends on how much you earn. For the 2024 to 2025 tax year, you will pay:

• Nothing on the first £242 of weekly earnings
• 8% on weekly earnings between £242 and £967
• 2% on weekly earnings over £967

Your employer will take your NICs from your wages before you get paid, and this will show on your payslip.

If you are self-employed, you will pay Class 4 National Insurance, depending on your profits. Most people pay through Self Assessment. If your profits are £6,725 or more, your Class 2 contributions are treated as having been paid to protect your National Insurance record.

If you are both employed and self-employed, your employer will deduct your Class 1 National Insurance from your wages, and you may also have to pay Class 4 National Insurance for your self-employed work.

National Insurance contributions are usually taken automatically. As an employee, you are normally paid through a Pay As You Earn (PAYE) system, which means your NICs are automatically paid from your salary.

National Insurance contributions stop at State Pension age

Once you reach the State Pension age, you stop paying National Insurance contributions. This is true even if you are still working. If you are an employee, you can show your employer proof of your age, such as a birth certificate or passport, to ensure that you stop paying National Insurance. If you do not want to show your employer these documents, you can ask HMRC to send you a letter to show them instead. This letter will confirm that you have reached State Pension age and no longer need to pay National Insurance.

If you are self-employed, you stop paying Class 4 National Insurance contributions from 6 April (the start of the tax year) after you reach State Pension age. Your Class 2 National Insurance contributions will no longer be treated as paid. It is important to note that you will still need to send a Self Assessment tax return for each year you work, even after reaching State Pension age.

If you have paid National Insurance contributions when you were no longer liable to do so, you can claim back the overpaid amounts from HMRC. It is also worth noting that while you don't pay National Insurance on your pension income, you may still have to pay Income Tax on these payments if your taxable income exceeds your tax-free allowances.

The State Pension age is currently 66 but will rise to 67 between 2026 and 2028. It is important to check your state pension date, as you may need to stop paying National Insurance once you reach this age.

You may be liable to pay income tax on pension income

While you don't have to pay National Insurance on your pension income, you may be liable to pay income tax on it. This is because, while the state pension is taxable, it's usually paid without deductions.

You can enjoy up to £12,570 a year from your pension tax-free as a personal allowance. However, you'll have to pay income tax at a rate of 20% on sums between £12,571 and £50,270. Above this amount, you'll be in the higher-rate tax bracket of 40% (between £50,271 and £125,140) and from £125,140 upwards, the tax rate is 45%.

You get 25% of your pension tax-free, which many people take as a lump sum. Alternatively, if you choose not to take the tax-free lump sum and withdraw it as income in smaller amounts, you could get 25% of each withdrawal tax-free (the remaining 75% of each withdrawal will be taxed).

With other pension income, your provider usually deducts any tax owed before paying you, so you won't have to do anything. If you are in any doubt about how much tax you owe, it's a good idea to speak to a financial adviser.

National Insurance contributions can be claimed back if overpaid

National Insurance contributions are collected on income from employment or self-employment. They are not paid on payments from a pension. Once you reach State Pension age, you stop paying National Insurance contributions. If you are self-employed, you're still assessed for Class 4 National Insurance contributions in the tax year in which you reach State Pension age.

If you've paid National Insurance contributions when you are no longer liable for them, you can claim back the overpaid amounts from HMRC. You can use the tool on the Gov.uk website to check how to claim a refund on your National Insurance contributions. There are different classes of National Insurance, so you'll be asked what class your refund is for.

You can also claim a tax refund if you've had too much deducted from your pension or overpaid through your job. If you complete a tax return, you can also correct mistakes and claim a refund via Self Assessment.

It is possible to overpay National Insurance if, for example, you have paid National Insurance after reaching State Pension age, or if you are highly paid and have more than one employment or are employed and self-employed on high earnings and didn't apply for deferment.

Frequently asked questions