Paying a company pension or annuity through your payroll
Find out 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 HMRC do not 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. Do not 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 do not 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 cannot 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 do not 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
- do not 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 do not 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
- and you add another new pension you do not need a new payroll record - just put the new increased amounts into the FPS fields
- and 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 two 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’re moving pension recipients from one payroll to another and you need a new PAYE reference you should:
- transfer the payroll records to the new employer reference
- send an FPS under the old employer reference with leaving details, including the year to date pay and tax figures – do not prepare P45s
- send an FPS under the new employer reference restarting the year to date figures from zero - 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
- 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
- work out and deduct PAYE tax from any payments you make to the transferred pension recipients from the date they moved payrolls
- if you’re operating a cumulative tax code, use the pay and tax details from the old employer reference
You must submit the last FPS from the old reference before you submit the first FPS for the new reference. If you cannot to do this, contact HMRC’s Employer Helpline.
Contact HMRC at least 2 months before the scheduled transfer if you’re moving members that receive pension payments from one payroll to another under a new PAYE reference, and they:
- receive more than one pension under the existing PAYE scheme which are paid under separate payroll IDs and this arrangement continues under the new PAYE scheme
- have multiple pensions paid under one payroll ID at the old reference but will be paid under separate payroll IDs at the new reference
- have a suffix T code, including 0T and NT
- are paid in advance and the month 12 FPS shows an end date which falls in the following tax year, for example a pay date of 1 April and an end date of 30 April
HMRC will contact you within 15 working days for further information about these cases. They will review them and, if appropriate, issue revised tax codes after the transfer has taken place.
Updates to this page
Last updated 13 March 2020 + show all updates
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Updated information on moving pension recipients from one payroll to another.
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New section added on payments to an employee who has flexibly accessed their pension pot.
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First published.