Tax code warning: Reached state pension age? Make sure you check your tax code

State Pension: Expert outlines criteria to qualify

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Britons are able to start claiming the regular payments when they reach the state pension age of 66 years old and have paid at least 10 years of National Insurance Contributions (NICs). Tax codes outline how much an employer or pension provider should be taken for tax purposes from a person’s wages or pension. The Department for Work and Pensions (DWP) notifies HMRC automatically once a person has decided to claim their state pension. 

This should happen about five weeks before a person reaches state pension age.

State Pension income is taxable income however Britons do not pay tax on it if it is below the personal allowance threshold of £12,570. 

In 2022-23, people who receive just a state pension get £185.15 a week which is £9,627.80 a year.

If a person has other income streams, such as rental property, which take it above the threshold then the person will need to fill out a self assessment tax return in order to pay the correct amount of tax on their income. 

READ MORE: Inheritance tax rate could be slashed to zero

Her Majesty’s Revenue and Customs (HMRC) is responsible for sorting and allocating tax codes to each Briton both in work and in retirement, ensuring that they pay the correct amount of tax for their circumstances.

However, Britons are urged to always double check that their tax code is correct as errors can occur within the system and if HMRC does not have the correct up-to-date information. 

If HMRC has the wrong information, they will put a person on an emergency tax code. 

Britons can find what tax code they are on through their personal tax account, through their payslip, or by contacting the tax authority. 

If on an emergency tax code, the tax code will show either 1257 W1, 1257 M1, or 1257 X.

HMRC states on its website that emergency tax codes are “temporary measures”. 

It said “HMRC will usually update your tax code when you or your employer give them your correct details. 

“If your change in circumstances means you have not paid the right amount of tax, you’ll stay on the emergency tax code until you’ve paid the correct tax for the year.”

Employers can also assist a person in updating their tax code by providing details to HMRC. This could be about a person’s previous income or pension.

The Low Incomes Tax Reform Group (LITRG) said that one of the main causes for tax code problems in the UK is that the DWP does not operate as a Pay as You Earn (PAYE) on a state pension. 

Its website said: “This forces the PAYE system to collect tax on two sources of income through one tax code. 

READ MORE: State pension warning as Britons make ‘common mistake’

“For example, you may pay tax on both your state pension and an occupational pension through the tax code issued for your occupational pension.”

The LITRG explained that in the first year of a person receiving their state pension, they will “more than likely receive payment for only part of the year”. 

HMRC normally include a full year’s pension in a person’s tax coding notice and will then tell a person’s employer or pension payer to use a special type of code called a week one or month one code – to make sure that they pay the right amount of tax for what they received.

The group also highlight that adjustments may also be caused by employment, such as taxable benefits, special work allowances or subscriptions and may need to be reduced in the final year of work. 

This is because if a person retires part way through a tax year, they will then be unlikely to require a full year’s adjustment to your tax code.

The group said: “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.”

If people believe that their tax code is wrong, then they can update their details online in the tax code online service or by contacting HMRC.

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