Your tax code changes, State Pension interacts with PAYE, and pension lump sums have their own rules. Here's how to get it right.
Not necessarily. PAYE only applies to income from employment and most workplace or private pension payments. The State Pension is not taxed through PAYE — instead, HMRC adjusts your tax code on your other income to account for it.
If you continue to receive a workplace pension, your pension provider will act as your "employer" for payroll purposes, deducting tax from each payment using a tax code. If you have no other taxable income, you'll simply stop getting payslips and may receive your State Pension gross (untaxed).
When you retire, your tax code often changes to 1257L — the standard code — unless you have other taxable benefits or income. If you also receive the State Pension, HMRC may issue a K code to your pension provider or employer so that the State Pension tax is collected from your other income.
Once you reach State Pension age, HMRC will usually send your pension provider/employer a K code that includes the State Pension amount. This ensures tax due on your State Pension — which is not taxed at source — is recovered across your other taxable income.
If you have a large State Pension plus a workplace pension, your K code could mean you owe more tax than your Personal Allowance covers. This is normal, but always review whether the figures HMRC uses are correct.
Most defined contribution pensions let you take up to 25% of your pot as a tax-free lump sum. The remaining 75% is taxable income when you draw it — through flexi-access drawdown or by buying an annuity.
A common shock at retirement: your first lump-sum withdrawal from a pension is often taxed on an emergency basis (Month 1) — and you may pay too much. The provider uses a code like BR or 0T until your annual allowance is confirmed by HMRC.
If your first pension withdrawal is taxed at 20–45% and your total income is actually below the Personal Allowance, you'll have overpaid. You can reclaim this from HMRC — either online via your Personal Tax Account or by calling 0300 200 3300. Refunds are typically processed within 30 days for simple cases.
Your workplace pension (including the new State Pension top-up) is paid through payroll on a net pay basis — the pension provider deducts tax using a PAYE code before paying you. This means:
For most people, this is automatic and correct. But if you take two pensions (e.g. a private pension and a public sector pension), HMRC may issue a BR or D0 code on one of them to stop you getting double the tax-free amount.
Many people take on part-time work after claiming their State Pension. In that case, you may have two tax codes in one year:
When you retire from your employer, you should receive a P45 showing your total pay and tax deducted in that employment. Keep it — your pension provider or next employer will need it to set your correct tax code. If you lose it, contact HMRC for a replacement or use the HMRC App to view your income and tax history.
From April 2026, the full new State Pension is approximately £13,100 per year — meaning it may exceed the Personal Allowance of £12,570 for many retirees. That means pensioners with the full State Pension + any other income will pay at least some tax.
HMRC sometimes uses estimates of pension income that are overshot. The most common mistakes after retirement:
In every case, you can correct the code by calling HMRC. You'll usually receive a revised PAYE coding notice (P2) in the post or in your online account.