Retired and returning to work?

How am I taxed if I return to work after retirement?

As a retiree, you might have different sources of income. For example, you might receive a state pension and you might also have other private or occupational pensions, which you will pay tax on, as well as investment income.

If you go back to work, your earnings will be added to these other sources of income and your income tax calculation is based on your total income for the tax year. We have a guide explaining how pensioners are taxed on our page How do I work out my tax?

People who have reached state pension age usually do not pay National Insurance contributions – see our guidance on National Insurance after retirement for full information. If you return to work as an employee, you might need to make sure your employer is aware that you have reached state pension age, so they know not to deduct National Insurance contributions from your pay.

How can I make sure I pay the right income tax as an employee?

If you are returning to work as an employee, then income tax should be deducted from your wages before being paid to you, under Pay As You Earn (PAYE). If you have other sources of income, such as from workplace/ private pensions or state pension, then it will be important to make sure your tax code is correct from the beginning of your new employment. You can read more about the problems that can arise with tax codes on retirement (and how to avoid them!) on our page Tax code problems on retirement.

If you do not have a form P45 to give to your new employer (which you would usually only have if you had finished another employment in the same tax year), you will need to complete a Starter Checklist. Often your new employer’s payroll team will ask you to complete this, but if not then you can find and print one on GOV.UK. It is important that this form is filled out correctly and handed to your employer’s payroll department to help make sure your tax code is correct. Doing this should mean that enough tax is deducted from your employment income under PAYE and avoids an unexpected tax bill later down the line. However, it is still worth also checking your PAYE code for yourself. You can read more about completing a Starter Checklist here.

What if I go back to work on a self-employed basis?

If you go back to work on a self-employed basis then you might find our Self Employment Guide helpful. This is a detailed guide of what needs to be considered when starting a self-employed business.

If you have previously been self-employed before retirement, you might be familiar with dealing with tax as a trader. However, there are some important changes that you might not be aware of, in particular, the upcoming introduction of Making Tax Digital for Income Tax.

Making Tax Digital for Income Tax

This will be a new way of keeping business records and reporting income to HMRC. The scheme is currently set to be rolled out to self-employed people and landlords from 6 April 2024.

Under Making Tax Digital for Income Tax (MTD), most traders with gross income exceeding £10,000 a year will be required to maintain business records digitally and make quarterly reports of their business income and expenses to HMRC, along with an end of period statement and final declaration.

You can read more about MTD for income tax on our website. There is also some information on GOV.UK. We will be producing more detailed guidance for traders and landlords in the coming months.

Trading Allowance

If you are undertaking only a small amount of casual self-employed work, then you might consider using the Trading Allowance. If your gross income (before deducting any expenses) from self-employed/casual work is less than £1,000 in a tax year then the trading allowance may apply automatically and you may not need to register your self-employment with HMRC or complete a Self Assessment tax return.

If your gross income from casual work is more than £1,000 in a tax year then you can still use the trading allowance instead of claiming your actual business expenses if you wish. This might be beneficial if your actual business expenses are less than £1,000.

You can read more about the Trading Allowance on our page What is the trading allowance?.

Are there any pension issues to consider?

When returning to work, you might wish to make pension contributions from your earnings. You are generally able to do this as long as you are under the age of 75, subject to certain contribution limits.

Pension contributions: auto-enrolment for employees

Employers in the UK must automatically enrol certain employees into a workplace pension scheme – this is often called ‘auto-enrolment’.

If you have not yet reached state pension age and earn more than £10,000 a year, then you should be automatically enrolled into a workplace pension scheme by your employer, unless you decide to opt-out. You can read more about auto-enrolment generally on our page What is automatic enrolment for employees?.

If you are over state pension age, you will not be automatically enrolled in a workplace scheme. However, you can still contribute to an employer’s workplace pension scheme if you wish (provided you are under 75). You have to earn over a certain amount to qualify for an employer contribution. You can read more about auto-enrolment if you are above state pension age on the Money Helper website.

Limits on pension contributions: Money Purchase Annual Allowance

If you have already started to take money from a defined contribution pension pot, then you will need to bear in mind the Money Purchase Annual Allowance (MPAA) when making further contributions to a pension scheme. This applies whether your further contributions are via an employer workplace scheme, or via a private scheme (for example if you are self-employed).

The MPAA usually will not apply if:

• You have only taken a tax-free lump sum from a defined contribution pension, but the rest of the pension pot is untouched, or

• ​The pension pot was cashed in under the ‘small pot lump sum’ rules.

We would recommend you check with any existing pension scheme(s) from which you have taken benefits to see if you are liable to the MPAA.

If the MPAA does apply to you, then the amount of any further contributions to any pension scheme is limited to £4,000 per year (gross). If you contribute more than this, then you will face a tax charge on the gross contributions exceeding £4,000 in a tax year.

You are also required to notify any other existing or new pension providers that you are liable to the MPAA. You could face a penalty from HMRC if you fail to notify. Therefore, if you are auto-enrolled in a new pension scheme under a new employment (or opt-in if over state pension age), you must make sure you tell the pension provider that you have triggered the MPAA as soon as you receive your welcome pack.

You can read more about the MPAA our page What is the tax position when I take money from my pension flexibly?.

Will my benefits be impacted by a return to work?

If you are a carer and receive Carer’s Allowance then this might be affected by a return to work, as entitlement to the benefit is limited to those with weekly earnings of £132 (after tax, National Insurance and expenses). You would therefore need to bear this earnings limit in mind if you wish to preserve your entitlement to Carer’s Allowance. You can read more about this on our page Tax and Benefits for Carers.

If you are in receipt of Universal Credit or Pension Credit, or any other means-tested benefits, then your awards might be impacted if you return to work. You may need to notify the Department for Work and Pensions or any other department who administers your benefit (such as your local authority) of a change in circumstances.

We would recommend speaking to a welfare rights advisor to understand how any benefits you receive might be impacted by a return to work.