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Example - tax year 2012-13

You're 67, have retired and get a company pension of £6,000 and a State Pension of £5,577.

You're entitled to the full age-related Personal Allowance for your age-group because your total income before allowances is less than £25,400 - the income limit.

Your tax code is adjusted to collect the tax due on your State Pension out of your company pension like this:

• your age-related Personal Allowance - the amount you can receive tax-free in the tax year is £10,500
• HMRC subtracts your State Pension of £5,577 (this is the taxable income that you are in fact receiving without tax taken off - to take account of this it's taken from your tax-free Personal Allowance)
• that leaves you with a balance of Personal Allowance of £4,923 (this is the remaining amount of income you can receive without paying tax)
• your tax codes becomes 492P - P indicates entitlement to the full age-related Personal Allowance for the age 65-74 and 492 is the amount of the allowance with the last number removed
• HMRC subtracts the balance of your Personal Allowance (4923) from your company pension (£6,000)
• that means that the amount of company pension you pay tax on is £1,077

Examples of State Pension collected via a company pension provider

Example - tax year 2011-12

You’re 67, have retired and get a company pension of £6,000 and a State Pension of £5,577.

You’re entitled to the full age-related Personal Allowance for your age-group because your total taxable income is less than £24,000 - the income limit.

Your tax code is adjusted to collect the tax due on your State Pension out of your company pension like this:

• your age-related Personal Allowance - the amount you can receive tax-free in the tax year - is £9,940
• HM Revenue & Customs (HMRC) subtracts your State Pension of £5,577 (this is the taxable income that you are in fact receiving without tax taken off - to take account of this it’s taken from your tax-free Personal Allowance)
• that leaves you with a balance of Personal Allowance of £4,363 (this is the remaining amount of income you can receive without paying tax)
• your tax code becomes 436P - P indicates entitlement to the full age-related Personal Allowance for age 65-74 and 436 is the amount of allowance with the last number removed
• HMRC subtracts the balance of your Personal Allowance (£4,363) from your company pension (£6,000)
• that means that the amount of company pension you pay tax on is £1,637

Further information

To find out more about how your tax code is worked out if you get a pension and and/or state benefits including the State Pension read the related article ‘Pensions, state benefits and your tax code’.

• Pensions, state benefits and your tax code

• Check Income Tax rates and allowances for tax year 2012-13 Opens new window

Useful contacts

• Money, tax and benefits contacts

• National Insurance Contributions Office