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HMRC internal manual

PAYE Manual

PAYE operation: pensioners: Flexibly accessed pension payments

Pension flexibility

From April 2015, new rules on pension flexibility allow individuals to opt to take one off or irregular payments rather than receiving a fixed regular income from their pension fund. There could be one or more payments for a year for a number of years, several payments a year over a shorter timeframe or the full value of the fund could be taken in one payment.

Regardless of the form in which these payments are taken, they will be taxed as pension income and the normal PAYE rules will apply to them.

These pensioners are flexibly accessing their pension if they receive any of the following on or after 6 April 2015:

  • a payment from a flexi-access drawdown fund, including a payment from a capped drawdown fund that would breach the cap
  • an uncrystallised funds pension lump sum (UFPLS)
  • a payment under a flexible annuity contract
  • a payment of a money purchase scheme pension where the scheme has fewer than 11 other pensioner members and they became entitled to the scheme pension on or after 6 April 2015
  • a stand-alone lump sum from a money purchase arrangement where the individual was entitled to primary protection but not enhanced protection, that is where Circumstance A in article 25B(2) of the Taxation of Pension Schemes (Transitional Provisions) Order 2006 applies

In addition any person who had a valid notification for flexible drawdown before 6 April 2015, will be deemed to have flexibly accessed their rights at the start of 6 April 2015.

Pension flexibility - PAYE

Normal PAYE rules will apply to these payments.

If a member has a P45 from a previous source / employment dated on or after 6 April in the current year, the scheme administrator will operate the code on the P45 on a Month 1 basis.  We will issue a tax code to operate against future payments.

If a scheme administrator already makes payments to a member and has a tax code for those payments, the tax code should only be used for additional flexibly accessed payments if they are being made at the same time.  If more than one payment in a month is made and the same tax code is operated against each of those payments it could give the benefit of the tax allowances and rate bands twice.

In all other circumstances, including where individuals have a P45 from the previous tax year, the scheme administrator will use the emergency tax code on a month 1 basis against the first payment and we will issue a tax code to operate against future payments.

Where a one-off payment is received the scheme administrator will issue a P45 which will enable the member to claim any tax refund that might be due in-year.

PAYE94055 provides guidance on how to deal with an in-year claim for repayment.