Hi, just managed to get myself confused: I am sure I read from the books somewhere to say that pension is included in the earned income, but I was told by a HMRC person that pension should not be included in the taxable earned income...???
My question is that if a retired person decide to go for self-employed, and she receives a pension (not state pension, and with tax already deducted at source) as well as making a profit for her business, so is it correct that her taxable earned income includes: Gross pension+ taxable profit?
Pensions are taxable income, but not earned income as such, which may be why the confusion with HMRC occurred?
So if you are calculating a retired person's tax liability you would include any pension income (including state pension) as well as self employment income (profit for tax purposes) to give their total taxable income.
To make matters more complicated technically pensions are "deferred income"!
This is because contributions to pensions are made without payment of tax, deferring when it may be treated (depending on the circumstances) as taxable income. From memory before 2008 contrinutions to pensions could only be based on "earn't income" . When the rules changed in 2008, "earned income" changed in relation to pensions.
