How do I check my coding notices?
If you get money from an occupational pension, private pension or retirement annuity, the pension payer deducts tax from your pension under the Pay As You Earn (PAYE) system. HM Revenue & Customs (HMRC) issue a PAYE code to the pension payer, to tell them how much tax to take off.
How does PAYE work?
There is general information on how PAYE works for both employees and pensioners in the 'employed section' of this website. In this section, we look at some pensioner-specific issues.
What happens when I start to receive a pension?
When you start to receive a pension for the first time, HMRC are not able to work out your tax code until they have received some information from either you or your pension provider.
You may have a form P45 to hand to your pension provider, if, for example, you have just stopped working and immediately afterwards start to take a pension.
But if you do not have a form P45 to hand, your pension provider should send details of your new pension direct to HMRC via the electronic PAYE system. As a pensioner, you will not see this yourself, as the pension company submits the information direct to HMRC.
What are payslips?
If you are getting a pension, you generally do not get a payslip with each pension payment. However, you should get some form of notification if there is any change to the amount of pension payment, for example, if your tax code changes.
What happens at the tax year end?
As long as you are receiving a pension at 5 April, the end of the tax year, your pension provider will give you an ‘end of year certificate’ – form P60 or its equivalent – by 31 May. This shows your pension and the tax deducted in the tax year. You should check that the P60 also shows the PAYE code that your pension payer is using.
Each time your pension payer pays you, they tell HMRC how much they have paid you and how much tax they have taken off. After the end of the tax year, HMRC check that the tax deducted is the right amount, according to their calculations, based on the information they hold. If it is, no further action is likely to be needed. If their calculations show that the right tax has not been deducted, HMRC will contact you.
There is more information on reconciliations and refunds in the 'employed section' of this website.
What is an emergency tax code?
Our ‘employed section’ explains when an emergency tax code may be applied. This tends to occur when you start a new job.
But emergency codes can also be used when taxing money taken out of pensions under the flexible pensions rules. This might be the case if you take money out in lump sums (rather than as a pension income), either regularly or irregularly, or if you take the whole amount of a pension pot as a lump sum. You may need to watch out as you may not pay the right tax at the right time. Read our separate guidance on this.
There is general information for employees and pensioners about who gets a PAYE coding notice in the 'employed section' of the website.
Pensioners may get coding notices more often than employees, as you may have more than one source of income. HMRC usually send these to you in February for the tax year starting on the next 6 April. If you do not receive them, contact HMRC to ask for copies.
How do I check my PAYE coding notice?
There is information for employees and pensioners on how to check your PAYE coding notice in the 'employed section' of this website.
You should check your PAYE code and what tax your pension payer is taking off your income. If you do not understand your PAYE code or think it might be wrong, you should query it with HMRC. You can find details of how to contact HMRC on the GOV.UK website.
Pensioners might receive more than one pension from the same pension provider. If this is the case, you should check that you have a code number for each pension – they might have different PAYE scheme reference numbers, for instance. The codes should be contained on the same coding notice. If you need clarification, as above, contact HMRC.
Notes explaining each item in the tax code calculation
The coding notice provides a note for every item in the tax code calculation. These notes are intended to help you to check your tax code, but the way the tax rules work means this is not always straightforward. There is more information in the 'employed section' of this website.
If you or your spouse or civil partner were born before 6 April 1935 and your income is more than £28,900, gift aid payments reduce your total income for the purposes of calculating your married couples allowance, meaning you could pay less tax. This means that an 'estimated income' figure on your coding notice should have been calculated deducting gift aid payments.
As gift aid payments are treated as paid after basic rate tax – 20% for 2018/19 – they need to be ‘grossed up’ before they are deducted from your income. So, you take the amount you paid, multiply it by 100 and divide it by 80 – meaning for every £80 you pay in gift aid, you get a £100 deduction from your income in the married couple’s allowance calculation.
Married couple’s allowance
If you have married couple’s allowance in your coding an adjustment has to be made, because your tax free amount reduces the tax you pay at 20%, whereas the law says that tax relief for married couple’s allowance is to be given at 10%.
For example, if you are a married man, born before 6 April 1935, and your income in 2018/19 is £19,880, your tax relief for married couple’s allowance will be £8,695 at 10% = £869.50.
But the calculation box in your coding notice would look like this:
This is how we worked out your tax code(s):
|personal allowance||11,850 (see Note 1 below)|
|married couple's allowance||4,348 (see Note 2 below)|
|Less state pension||7,865 (see Note 3 below)|
|a tax free amount of||£8,333 (see Note 4 below)|
Having £4,348 in your coding reduces the tax you pay, at 20%, by £869.50. This is the same result as £8,695 at 10%.
Here is an example to help you work out what your tax should be from your tax code. There are more examples in the 'employed section' of this website.
Tom receives an occupational pension of £14,300 a year before any tax is taken off. His pension is paid monthly and his code number for 2018/19 is 205L.
This means Tom has a tax free amount of allowances of £205 x 10 or £2,050.
|Take off tax free amount of allowances||2,050|
|Pension on which Tax pays tax||12,250|
|£12,250 @ 20% (basic rate)||2,450|
So the tax to be paid by Tom during 2018/19 is £2,450.
The tax he will pay each month is £2,450 divided by 12 = £204.17.
The code of 205L means that his personal allowance of £11,850 for 2018/19 has been reduced by £9,800. This is likely to be because his state pension is being taxed using this PAYE code. Tom should check that £9,800 is the amount of state pension he expects to receive in 2018/19. He can do this by checking it against the weekly amount he will be getting from April 2018, which the Department for Work and Pensions should notify him of by letter in around March 2018.
Where can I find more information?
You may be able to take money out flexibly from some kinds of pension, or the whole of your pension as a lump sum. In that case, you should read our guide to flexible pensions.
For information on how tax on your state pension is collected, also look at ‘how is my tax collected?’
Sometimes people face particular problems with their tax code on retirement. We have more information on the page ‘tax code problems on retirement’.