Tax code problems on retirement
When you reach state pension age, you might encounter problems with your tax code which may result in you paying the wrong amount of tax during the tax year. This page explains some tax code problems you may encounter and what to do.
What happens when my state pension starts?
The Department for Work and Pensions (DWP) notifies HM Revenue & Customs (HMRC) automatically once you have decided to claim your state pension. However, you should also let HMRC know, so that they can ensure their records are correct.
This automatic notification should happen about five weeks before the date when you reach state pension age.
One of the main causes for tax code problems is that the DWP does not operate Pay As You Earn (PAYE) on your state pension.
This forces the PAYE system to collect tax on two sources of income through one tax code (assuming you have another PAYE source of income). For example, you may pay tax on both your state pension and an occupational pension through the tax code issued for your occupational pension.
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.
You can see how this works in the example Wes.
⚠️ Note: You do not get a form P60 after the end of each tax year for your state pension, so you must keep your own records of your state pension income.
What if I have more than one source of pension income?
When you start getting your pensions, you may have more than one occupational or personal pension. Each pension (other than the state pension) will need its own tax code. You should check each of them to make sure that they are correct.
You need to make sure that you are not getting too many or too few allowances by looking at all of your tax codes for a tax year together – these should all be shown on the same coding notice from HMRC. You should also be able to see them in your Personal Tax Account. You can see what allowances you should be entitled to in total by referring to the page on tax allowances and then using this to help you check.
Depending on how you take money out of your pension, you may not necessarily pay the right tax at the right time, so keep an eye on how much you are paying. If you take money flexibly from your pensions, you might pay too much (or sometimes not enough) tax when you take the money out. Read our separate guide to flexible pensions.
What if I had employment benefits and expenses included in my PAYE code but I have now retired?
Many adjustments caused by employment, such as taxable benefits, special work allowances or subscriptions, may need to be reduced in the final year of work. This is because if you retire part way through a tax year, you are unlikely to require a full year’s adjustment to your tax code.
In the second year after retirement, make sure that any adjustments that were due in earlier years from your prior employment are not being simply carried forward by HMRC, because you had them last year. For example, if your previous employer provided you with private medical insurance, you need to check that this benefit is not included in your coding notice for your pension.
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 (£10,600 for a full year).
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.
Where can I find more information?
If you do not understand your PAYE coding notice or think it is wrong, you should contact HMRC.