Guidance

Paying a company pension or annuity through your payroll

What's different for PAYE when paying a pension recipient, commutation, lump sum arrears and other circumstances.

Overview

If you’re paying a company pension to a retiring employee you put the payment through your payroll, but not in quite the same way as when you pay wage or salary payments to employees.

If your pension scheme is registered with HM Revenue and Customs (HMRC) don’t deduct or pay any National Insurance contributions. Pensions paid from registered schemes include those paid when an employee retires through ill-health. You should deduct PAYE tax in the normal way.

If your pension scheme isn’t registered with HMRC contact HMRC’s Employer Helpline.

Employee gets a new pension

When you start paying a new pension to an employee who has just retired from working for you, carry on using their existing payroll record - but you’ll need to give them a different Payroll ID for the pension payments. Don’t include their leaving details on your Full Payment Submission (FPS) as they’re still on your payroll.

If they’re going to carry on working for you, you’ll need to set up a new payroll record and Payroll ID for their pension payments.

If you add multiple pensions together so that you make just one payment you only need one pension payroll record - but if you pay each pension separately you’ll need a unique payroll record and Payroll ID for each pension.

New payroll information for pension recipient

You’ll need this information for the FPS:

  • the date their pension started
  • ‘Yes’ in the occupational pension indicator field - and do this for each pension payment you make
  • full annual amount of the pension
  • Payroll ID - it has to be a new one for their pension payments
  • Payroll ID changed indicator and their previous Payroll ID

Tax code to use

Use the table below to check what code to use until you get a new code from HMRC.

Pension recipient’s situation Tax code to use
Employee has just retired from working for you The same tax code you used for them when they worked for you - but on a ‘week 1’ or ‘month 1’ basis
Employee who will start getting a pension from you and carry on working for you Code 0T on a ‘week 1’ or ‘month 1’ basis
Employee who used to work for you and has now reached the age when they can get a pension from you - and they have a P45 from another employer The tax code from their P45 on a ‘week 1’ or ‘month 1’ basis
Employee who used to work for you and has now reached the age when they can get a pension from you - but they don’t have a P45 from another employer The emergency tax code on a ‘week 1’ or ‘month 1’ basis

If the pension recipient gives you a P45 after you’ve started paying their pension and HMRC has already given you a new tax code, destroy the P45. But if you haven’t been given a new tax code, use the tax code from the P45 on a ‘week 1’ or ‘month 1’ basis.

New pension paid to a dependent

If your new pension payment is to a dependent of an employee who’s died, follow the steps outlined in the earlier section to set up new payroll information - but use the personal details and National Insurance number of the dependent.

Show on your payroll that the pension is being paid because they’re a recently bereaved spouse or civil partner.

Starting a new tax year

If HMRC hasn’t given you a new tax code by the end of the tax year, carry on using the same tax code in the new tax year but:

  • apply the code on a cumulative rather than a ‘week 1’ or ‘month 1’ basis
  • make any adjustments to the code that are required by the P9X coding notice - HMRC will send you this

Pension recipient changes name or address

Enter the new details on your payroll records - but the pension recipient must also Report a change of name or address to HMRC.

If the recipient moves and you can’t trace them you may have to stop their pension payments - if you do this, set the irregular payment pattern indicator. If you later find their new address, take the irregular payment pattern indicator off when you restart their payments.

Pension recipient dies

Put their date of death as the leaver date in their payroll record. If this is the first time you’re telling HMRC they’ve died don’t set the payment after leaving indicator - if you have already told HMRC you must set it.

If you’ve more payments to make after they’ve died and they’re for the same tax year use the same tax code. But if you have payments to make for a later tax year use the tax code you would have used if the recipient had still been alive - unless you’ve already told HMRC they’ve died. If you have told HMRC, set up a new payroll record and:

  • use the code 0T on a ‘week 1’ or ‘month 1’ basis
  • set the payment after leaving indicator

Pension paid to non-individual

If the pension passes to another individual (or individuals) set up a new payroll record for each new recipient. But if it’s to a ‘body’ (such as a Personal Representative, Trustee or Body Corporate) then:

  • use the tax code ‘BR’
  • leave the National Insurance number field blank
  • enter ‘male’ as the gender
  • enter ‘RP’ as the forename
  • enter the name of the recipient body as the surname
  • enter the address of the recipient body
  • put ‘Yes’ in the payment to a non individual indicator field
  • don’t enter a start date for the new recipient

Flexible access arrangements

If you’re paying pension payments to an employee who has flexibly accessed their funds, how you deal with these payments depends on whether they’re paid after, or instead of, any other pension benefits.

Paid after the standard pension benefits Paid as the first and only payment from the pension
Treat the payment the same as earlier pension payments and use the same tax code Use the emergency tax code on a week 1/month 1 basis
Give the pension recipient a P45 to show the pension has been paid off in full - with both the regular payments and the flexible access payment(s) Give a P45 to the pension recipient
Put the payment date on their payroll record as the date of leaving Put the payment date on their payroll record as the date of leaving
Complete the relevant fields on the FPS, including the payment type, and check box 168 Set the occupational pension indicator on the FPS and complete the relevant fields, including the payment type, and check box 168

Less common circumstances

Trivial commutation payments

These are one-off lump sums from defined benefit schemes that pay off, or are paid in place of a small pension, so that there’s no need to make regular payments - usually because the regular payments are small. They don’t include lump sums paid as death benefits or for serious ill health.

How you deal with a trivial commutation payment depends on whether it’s paid after or instead of any other pension benefits.

Paid after the standard pension benefits Paid as the first and only payment from the pension
Treat the payment the same as earlier pension payments and use the same tax code Use the tax code ‘BR’ on a week 1/month 1 basis
Give the pension recipient a P45 to show the pension has been paid off in full - with both the regular payments and the trivial commutation payment Give a P45 to the pension recipient
Put the payment date on their payroll record as the date of leaving Put the payment date on their payroll record as the date of leaving
Complete the relevant fields on the FPS, including the payment type Set the occupational pension indicator on the FPS and complete the relevant fields, including the payment type

Adding multiple pensions together

If you make one payment to a recipient made up of more than one pension:

  • set up one payroll record only
  • if you add another new pension you don’t need a new payroll record - just put the new increased amounts into the FPS fields
  • if one of the pension finishes show the new, lower amounts in the FPS fields

Paying more than one pension separately

If you pay a recipient more than one pension separately:

  • set up a payroll record and Payroll ID for each pension
  • use the tax code appropriate for each pension

Merging pensions that were previously separate

If you merge 2 or more pensions into a single payment, for each pension you’ve stopped paying separately:

  • put a leaving date on the payroll record
  • give a P45 to the pension recipient

Moving pension recipients from one payroll to another

If you move pension recipients from one payroll to another but both have the same employer PAYE reference there’s no need to do anything different with your payroll.

But if you’re moving pension recipients from one payroll to another and you need a new PAYE reference take the following steps:

  1. Transfer the payroll records to the new employer reference.
  2. Under the old employer reference send an FPS with leaving details, including the year to date pay and tax figures. Don’t prepare P45s.
  3. Under the new employer reference send an FPS restarting the year to date figures from zero.
  4. Put the full starting details for each recipient on the FPS for the new reference and include the:
    • start date for the new payroll
    • annual amount of their pension
    • occupational pension indicator
  5. Leave the occupational pension bereavement field on the FPS blank unless you’re paying the pension to a dependent who’s been bereaved since the pension recipient joined the new payroll.
  6. Work out and deduct PAYE tax from any payments you make to the transferred pension recipients from the date they moved payrolls.
  7. If you’re operating a cumulative tax code use the pay and tax details from the old employer reference.

Submit the last FPS from the old reference before the first FPS for the new reference - if you can’t, contact HMRC’s Employer Helpline.

Published 12 June 2014
Last updated 6 April 2015 + show all updates
  1. New section added on payments to an employee who has flexibly accessed their pension pot.
  2. First published.