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From 6 January 2024, the main rate of class 1 National Insurance contributions (NIC) deducted from employees’ wages is reduced from 12% to 10%. From 6 April 2024, the main rate of self-employed class 4 NIC will reduce from 9% to 8% and class 2 NIC will no longer be due. Those with profits below £6,725 a year can continue to pay class 2 NIC to keep their entitlement to certain state benefits. Our guidance will be updated in full in spring 2024.

Updated on 6 April 2023

How tax is collected on the state pension

The state pension is taxable. Here we look in more detail at how tax is collected on the state pension.

Content on this page:

Overview

As explained on our page Tax on the state pension, your state pension is paid by the Department for Work and Pensions (DWP). The DWP does not operate Pay As You Earn (PAYE) on your state pension – so you receive it gross, without any tax collected at source before it is paid to you.

Therefore, it will often be the case that tax must be collected on your state pension via another PAYE source of income (usually another private pension, if you have one). As a result, the PAYE system collects tax on two sources of income through one tax code.

Collection through PAYE

If your total taxable income, including your state pension, is greater than your tax-free allowances and reliefs, you will have to pay tax on the portion of your income that exceeds your allowances. It is important that you check your coding notice, to make sure you have been given the correct allowances and reliefs, the amount of state pension that has been ‘coded in’ is correct and that are paying the right tax.

Example: Donald

Donald receives a company pension of £9,000 a year and state pension. His state pension for 2023/24 is £9,500.

We work out what tax-free allowances can be set against Donald's company pension (once the state pension has been taken into account) like this:

  £
Personal allowances for 2023/24 12,570
Less: state pension (9,500)
Allowances to go against company pension 3,070


This means that of the £9,000 company pension he receives, Donald will pay tax on £5,930 (£9,000 - £3,070). 

If it is not possible for HMRC to collect any tax due on your state pension through the PAYE system, you may have to complete a Self Assessment tax return each year. Alternatively, HMRC may send you a Simple Assessment.

HMRC will check how much tax you have paid after the end of the tax year. If for whatever reason PAYE has collected too much tax, they should contact you.

Starting to receive state pension

The DWP notifies HM Revenue & Customs (HMRC) automatically once you have decided to claim your state pension. This automatic notification should happen about five weeks before the date when you reach state pension age.

However, you should also let HMRC know, so that they can ensure their records are correct.

In the first year you get your state pension, you will more than likely receive payment for only part of the year. HMRC will normally include a full year's pension in your coding notice and then tell your employer or pension payer to use a special type of code – called a week 1 or month 1 code – to make sure that you only pay the right amount of tax.

Example: Wes

Wes reaches state pension age on 5 October 2023, during the 2023/24 tax year. He starts to receive his state pension of £203.85 a week from that date (which would be the equivalent of £10,600 for a full year, but only 5,300 for the period 5 October 2023 – 5 April 2024).

His total income on which he will pay tax is £14,000 including the state pension. He will only actually have to pay tax on £5,300 state pension in 2023/24 (6 months’ worth), but the full £10,600 will be shown in his coding notice. HMRC will tell his pension payer to operate a special tax code so that Wes is in fact only taxed on £5,300 of state pension for that year.

Tax on arrears (back-payments) of state pension

The DWP is reviewing some people’s state pensions after finding out that their systems were wrong. The errors mean that the DWP have paid some people less state pension than they should have – so you may be owed a back-payment.

If you receive a back-payment, you need to know how it affects your tax.

We understand that the DWP will share information about the payments with HMRC to help you resolve any tax issues. Our information below will help you understand what should happen.

Back-payments of state pension that relate to an earlier tax year are taxable in the year you should have received them, not in the year they are actually paid.

You will only need to pay tax on the back-payments if your total income was more than your personal allowance for the relevant tax year. HMRC will only seek to collect income tax any part of the back-payment relating to the current tax year and the previous four tax years. This means that for any back-payments received in 2023/24, HMRC will not collect tax on payments that relate to tax years before 2019/20.

We understand that the DWP will tell HMRC when a back-payment has been made. HMRC will then contact you if they think you owe some tax.

We also understand that HMRC will allow you to set up a Time to Pay arrangement if need be, rather than pay any tax all at once.

Example

Ellie lives in England. She receives a letter from the DWP in October 2023 saying that they have not paid her enough state pension. They are sending her a lump sum of £1,440. Ellie has other taxable pension income. The sum and Ellie’s tax position is broken down as follows:

Tax year Amount of state pension back-payment £ Other income Personal allowance (PA) Spare personal allowance (PA minus other income) Taxable back-payment (back-payment minus spare PA) Tax due on back-payment at basic rate 20%
2017/18 100 11,600 11,500 None – other income more than PA 0 (more than 4 years ago) 0 (more than 4 years ago)
2018/19  200 11,800 11,800 None – other income more than PA 0 (more than 4 years ago) 0 (more than 4 years ago)
2019/20  220 12,600 12,500 None – other income more than PA 220 44
2020/21 240 12,200 12,500 300 None – spare personal allowance is more than back-payment) 0
2021/22 260 12,400 12,570 170 90 18
2022/23 280 12,600 12,570 None – other income more than PA 280 56
2023/24 140 12,800 12,570 None – other income more than PA 140 28
Total back payment    £1,440       Total tax £146

Death before back-payment is made

We understand in cases where the pensioner has unfortunately died prior to the back-payment being made, that the payment will go to the individual’s personal representatives or next of kin.

HMRC have told us that the tax position will vary depending on whether or not the pensioner receives a notification from the DWP that a back-payment is due before they died:

  • If both the notification of the back-payment and the payment itself are received after death, then HMRC will not collect income tax on the back payment. The payment will not be included as part of the deceased’s estate for inheritance tax purposes.
  • If the pensioner has been notified by the DWP that a back-payment will be made, but the payment is not actually received until after they have passed away, income tax will still be collected by HMRC (payable by the personal representatives). The payment will form part of the deceased’s estate for inheritance tax purposes.

Deferring your state pension

When you reach state pension age, you might decide not to claim straight away. This might particularly be the case if you are still working. We discuss this more on our page Putting off (deferring) claiming the state pension. We discuss the tax implications of receiving a deferred state pension lump sum on our page Tax on deferred state pension lump sums.

During the period of state pension deferral, you do not pay any tax on your state pension, as you are not claiming or receiving it.

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