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.
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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.
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.
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.
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.