In this section:

Tax codes - the basics
Understanding your PAYE Coding Notice
Emergency tax codes
Company benefits in your tax code
Expense payments in your tax code
Pensions, state benefits and your tax code
Other income taxed through your tax code
How underpayments of tax affect your tax code
If you have more than one tax code
What to do if your tax code is wrong

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Pensions, state benefits and your tax code

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 or personal 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 or company pension under your pension payer's PAYE system and also receive a State Pension or other taxable benefit, your Tax Office normally asks your pension payer 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 pension payer's PAYE system.

Your Tax Office issues your pension payer or employer with a tax code which allows them to work out how much tax (if any) to deduct.

Check which state benefits are taxable - on the Directgov website

Tax code adjustments for the State Pension and other benefits

In order to take account of the tax you owe on your State Pension or benefit your Tax Office adjusts your Personal Allowance in your tax code downwards by their annual value. 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 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.

Example of State Pension collected via a company pension payer

You're 67, have retired and get a company pension of £6,000 and a State Pension of £4,716. You're entitled to the full age-related Personal Allowance for your age-group because your total taxable income is less than £21,800 - the income limit. Your tax code is adjusted to collect the tax due on your State Pension out of your company pension like this:

your age-related Personal Allowance - the amount of income you can receive tax-free in the current tax year - is £9,030
we subtract your State Pension of £4,716 (this is taxable income that you are in fact receiving without tax taken off - to take account of this it's taken from your tax-free Personal Allowance)
that leaves you with a balance of Personal Allowance of £4,314 (this is the remaining amount of income you can receive without paying tax)
your tax code becomes 431P - P indicates entitlement to the full age-related Personal Allowance for age 65-74 and 431 is the amount of allowance with the last number knocked off
we subtract the balance of your Personal Allowance (£4,314) from your company pension (£6,000)
that means that the amount of company pension you pay tax on is £1,686

Learn more about tax codes

Understanding your PAYE Coding Notice

Overview of pensions and benefits entries on your PAYE Coding Notice

One or more of following pension or benefit entries may appear on your PAYE Coding Notice - sent to you at the start of each tax year, or if your tax code changes:

State pension/state benefits
Other pension
Forces pension
Public services pension
Taxable incapacity benefit
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 our guide 'What to do if your tax code is wrong' 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 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 we will tax you in a special way which ensures you pay tax only on the proportion that you actually receive.

End of year checks on tax deducted

At the end of the tax year we always check the total amount of tax you have paid and if it's too much we 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) we'll usually collect the tax you owe through your code for a later year. If this isn't possible we'll contact you regarding a suitable method of payment.

Keeping your Tax Office 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 your Tax Office, the sooner we can adjust your tax code to make sure you always pay what's due - no more and no less.

Contact your Tax Office