PAYE for pension and annuity payments - special situations

This guide outlines the steps HM Revenue & Customs (HMRC) requires you to take when making pension (including annuity) payments in specific situations, such as making 'trivial commutation' payments, paying more than one pension to an individual and suspending pension payments if you’re unable to track down its recipient.

For more general guidance on pension payments – including sending starting notifications to HMRC and making sure you use the correct tax code on payments – follow the link in the 'More useful links' section to the guide 'PAYE for pension and annuity payments'.

On this page:

Making a trivial commutation payment
Paying more than one pension to an individual
Paying pension arrears in a lump sum
Making payments under an ‘income drawdown’ arrangement
If you award a pension following work-related disability
If you can’t trace a pension recipient
Pension payments to a recipient who lives or moves abroad
More useful links

Making a trivial commutation payment

A trivial commutation pension payment is a one-off lump sum that pays off a pension in full, so that there’s no need to make the usual weekly, monthly or annual payments. Typically, these one-off payments are used if the regular payments would be very small.

If you’ve already made standard payments from the pension before making the trivial commutation payment:

for PAYE tax and National Insurance contributions (NICs) purposes, treat the trivial commutation payment in the same way as the earlier pension payments
complete a form P45 to reflect the fact that the pension will have been paid off in full – the P45 should take into account the regular payments you’ve made as well as the trivial commutation payment
send P45 Part 1 to HMRC (remember you must file online if you have 50 or more employees); give Parts 1A, 2 and 3 to the pension recipient

If the trivial commutation payment is the first and only payment from the pension:

there is no need to submit a form P46 (Pen) as is usually required when you start to pay a new pension
use the emergency tax code on a week 1/month 1 basis when putting the trivial commutation payment through your payroll
complete a form P45 – use the date of payment as both the starting and leaving date
send P45 Part 1 to HMRC (remember you must file online if you have 50 or more employees); give Parts 1A, 2 and 3 to the pension recipient

To read more about filing forms P45 and P46 online follow the link below

File your PAYE in-year forms online: P45, P46, etc

Top

Paying more than one pension to an individual

If the pensions are merged from the outset

If you add the multiple pensions together so that you make just one payment to the recipient:

send only one starting notification to HMRC
follow the usual payroll procedures for pension payments (see below)
there’s no need for a further starting notification if you subsequently add a further new pension into your merged payment to the recipient
don’t complete a P45 if one of the pensions ceases but others continue

Guidance on starting notifications and payroll procedures is contained in the separate guide 'PAYE for pensions and annuity payments' - follow the link at the end of this section.

If you pay the pensions separately

If you pay each pension separately, then you must complete a separate starting notification and make sure you use the correct tax code for each. For guidance, follow the link at the end of this section.

Merging pensions that were previously separate

If you merge into one payment two or more pensions that you were previously paying separately, you must complete and file a form P45 Part 1 for each pension that you’ll no longer be paying in its own right. (Remember that form P45 must be filed online if you have 50 or more employees.)

PAYE for pension and annuity payments

More about filing form P45 online

Top

Paying pension arrears in a lump sum

You must deduct PAYE tax through your payroll from any lump-sum payments of pension arrears that you make. Do this in the same way as for normal pension payments – for more information follow the link at the end of this section.

However, tax is actually due on the amount of pension that recipients are entitled to receive each tax year, not the amount they receive. This can cause complications if you have to make a lump-sum payment of pension arrears that span a number of tax years.

The recipient may end up paying more tax than if the payment had been spread over the years to which it relates - higher tax rates might have come into force in the meantime and the recipient may lose the benefit of allowances that would have applied in the earlier years.

Where a pension recipient has been disadvantaged in this way and they contact HMRC, HMRC will recalculate their tax liability as if the lump-sum arrears had been spread over the relevant years.

PAYE for pension and annuity payments

Top

Making payments under an 'income drawdown' arrangement

Income drawdown is a facility that allows individuals to defer purchase of an annuity from their pension provider, and to receive an income from their pension fund instead.

If you make payments to an individual under an income drawdown arrangement, HMRC will treat them in the same way as standard pension payments. So, when you make the first drawdown payment:

complete and file a form P46 (Pen) to HMRC – send it online if you have 50 or more employees
if you know the employee’s tax code for the current year, use it when operating PAYE on the payments
otherwise, use the emergency tax code on a week 1/month 1 basis

More about filing form P46 online

Top

If you award a pension following work-related disability

If a pension has been awarded to an employee because of a work-related disability and if payments are made from a scheme registered with HMRC then:

you must deduct PAYE tax from any payments you make from the scheme
you don’t need to deduct or pay any Class 1 NICs on the payments

If the payments are made from any other source including an unregistered pension scheme, then the payments may be wholly or partly exempt from tax and National Insurance. Contact the Employer Helpline on Tel 08457 143 143 for advice before making payments in these circumstances.

Top

If you can’t trace a pension recipient

If you have to suspend your pension payments to a pension recipient because you can’t locate them, you should inform HMRC.

If suspending your pension payments involves cancelling the recipient’s pension until you relocate them, then send HMRC a form P45 Part 1 entering 'nil' in the pay and tax boxes. (Remember you must file form P45 online if you have 50 or more employees.)

If you subsequently trace the pension recipient, inform HMRC before resuming payments to them. This is to allow HMRC to reinstate the recipient’s pension record.

More about filing form P45 online

Top

Pension payments to a recipient who lives or moves abroad

It is the pension recipient’s responsibility to inform HMRC when they move overseas (and again if they move back to the UK). You should continue to make your pension payments to the recipient in the same way as if they lived in the UK.

Top