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Wednesday, 3 October 2023

Pensions, state benefits and your tax code

The State Pension and some state benefits are taxable, but are paid without tax taken off. If you get a company, personal or public sector pension tax is taken off using the PAYE (Pay As You Earn) tax code system and you'll normally pay any tax due on your State Pension or state benefits through that system too. If you're working you may pay tax on them through your employer's tax code.

Paying tax on the State Pension and benefits through your tax code

Your State Pension and some other state benefits count as taxable income, but no tax is taken off when you receive them. If you pay tax on a personal, company or public sector pension under your pension provider's PAYE system and also receive a State Pension or other taxable benefit, HM Revenue & Customs (HMRC) normally asks your pension provider to collect any tax due on your State Pension or other benefit at the same time. They do this by adjusting your tax code to take account of the State Pension or benefit.

If you're still working and getting the State Pension or another benefit, the tax due on your State Pension or benefit will be collected either through your employer's PAYE system or (if you have another pension) through your personal/company/public sector pension provider's PAYE system.

HMRC issues your pension provider or employer with a tax code which allows them to work out how much tax (if any) to deduct.

Tax code adjustments for State Pension/other benefits - how they work

Income Tax rates and allowances

Check up-to-date figures for personal allowances from HM Revenue & Customs

In order to take account of the tax you owe on your State Pension or benefit HMRC adjusts your Personal Allowance in your tax code by deducting the amount of your State Pension or benefits. They may also make other adjustments to take account of other allowances or deductions that are relevant to you.

Anything left is the remaining amount of tax-free income that you're entitled to in the current tax year.

Your remaining tax-free amount is then deducted from your company/personal/public sector pension or employment income and you pay tax on what's left. If there's nothing left you don't pay any tax.

However, if there's a negative amount it means you owe tax on this amount so it's added to your taxable income.

Worked examples

To see worked examples of how a tax code is adjusted to take account of the tax owed on a State Pension follow the link below. The same principle applies for all other state benefits.

Overview of pensions and benefits entries on your PAYE Coding Notice

One or more of the following pension or benefit entries may appear on your PAYE Coding Notice - usually sent to you before the start of the tax year, or at other times if something has changed:

  • State Pension/state benefits
  • other pension
  • forces pension
  • public services pension
  • Taxable Incapacity Benefit
  • Taxable Employment and Support Allowance
  • estimated Jobseeker's Allowance

Each entry will show an estimate of the amount you will receive for that item in the tax year and will appear as a negative figure (which reduces your tax-free amount). If you think any of the entries are wrong refer to the guide ‘What to do if your tax code is wrong' - you'll find it under 'More useful links'.

Your tax code in the first year of your State Pension

In the first year you start receiving your State Pension this will show on your PAYE Coding Notice in one of two ways:

If you started receiving the State Pension at the same time as starting to receive your age-related Personal Allowance

In this case only the amount of State Pension you'll receive in the current year will show. The amount is deducted from your allowances, divided by the number of months remaining in the tax year, and you pay tax proportionately each month on what you owe.

If you started receiving the State Pension when you were already receiving the age-related Personal Allowance

If you were already getting the age-related Personal Allowance when you started to receive the State Pension (for example, because you delayed taking your State Pension, or your birthday falls late in the tax year) your new code will include the amount you would receive if the pension applied for the full year.

However, this doesn't mean that you will pay tax on the full year's pension - for the rest of the tax year your Tax Office will tax you in a special way which ensures you pay tax only on the proportion that you actually receive. There will always be a note on your PAYE Coding Notice explaining this.

End of year checks on tax deducted

At the end of the tax year HMRC always checks the total amount of tax you have paid and if it's too much they give you a refund. If it's too little (for example, if you get any State Pension before the date your new code is first used) they usually collect the tax you owe through your code for a later year. If this isn't possible they’ll contact you regarding a suitable method of payment.

Keeping HMRC informed if your benefits change

If you start or stop getting state benefits it may affect your tax bill. The sooner you get in touch with HMRC, the sooner they can adjust your tax code to make sure you always pay what's due - no more and no less.

Provided by HM Revenue and Customs

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