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Wednesday, 3 October 2012

Tax codes and tax forms explained for pensioners

If you pay tax on a pension and/or a job through the PAYE system it’s important to understand and check your tax code. It’s also important to contact HM Revenue & Customs (HMRC) if you think your tax code or any information that affects it is wrong.

What is a tax code?

A tax code is used by your employer or pension payer to calculate the amount of tax to deduct from your pay or pension. It’s usually made up of several numbers and a letter for example: 117L or K497.

If you have the wrong tax code (or tax codes) you could end up paying too much or too little tax.

To find out what your tax code means, how it’s worked out and understand what changes affect it, read the guide below.

Your PAYE Coding Notice

Your 'PAYE Coding Notice' is a paper notification that tells you what your tax code is and how it's worked out. It’s usually sent to you at the start of the tax year or at other times if something has changed. For example, if your entitlement to age-related or other allowances changes or if you’ve started receiving a new source of income or a new company benefit.

To understand the entries on your PAYE Coding Notice and to find out what to do if you think they are wrong read the guide below.

Pensions, state benefits and your tax code

The State Pension and some state benefits are taxable, but are paid without tax taken off.

If you get a company or personal pension, tax is taken off using the PAYE tax code system. You'll normally pay any tax due on your State Pension or state benefits through the PAYE system too.

However, if you're working you may pay tax on these payments through your employer's tax code.

To understand more about how the State Pension or state benefits affect your tax code follow the link below.

More than one tax code

If you have several sources of employment and/or pension income that are taxed through PAYE at the same time it can get confusing. It’s therefore very important to check your tax codes carefully to make sure you're paying the right tax.

If you think your tax code is wrong

HMRC issues your tax code based on information it has about your taxable income and allowances. It then tells your employer or pension payer how much Income Tax to deduct from your wages or pension.

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