Is HMRC overburdening me with my state pension?

Can you please help as I don’t know where to go? I turned 66 last week and had previously been told my weekly pension would be £183.62.

I fully expect to pay tax on this as I already receive two small working pensions of around £16,000 a year.

I received an email saying my tax codes have changed so I checked online and there is an obvious error. My tax codes for my existing pensions have been reduced for this year by the equivalent of a full year’s AOW income of £9,548.

Over the next three months of this tax year I will receive £2,911 in state pension but HMRC say they are acting on figures from DWP and there is nothing they can do.

DWP says they only inform HMRC about the start date and weekly payment so I asked HMRC again and they insist this happens to everyone.

Pension finances: I've just turned 66 and HMRC intends to overburden me with my state pension - how is this justified?

Pension finances: I’ve just turned 66 and HMRC intends to overburden me with my state pension – how is this justified?

Surely it can’t be right for them to knowingly take an extra £1,327 from me over three months only to realize they’ve overcharged me and issue a refund at some point.

If it’s right and this is the way it’s done, why am I only finding out now? Nowhere in anything I’ve read warns of such a situation.

I really don’t want to wait for a refund and indeed could do with the £450ish a month in my account from January. Is there any help or explanation of this absurd situation you can give?


Steve Webb replies: When I first read about your situation (and that of another This is Money reader with the exact same problem) my first reaction was that there had indeed been a mistake.

Once you have taken your case with HMRC it would appear that you are properly taxed but this is not explained very well.

So I hope I can clear up what’s going on, not least to help other people who are confused by what happens to their tax code in the year they start receiving their state pension.

Steve Webb: Find out how to ask the former Minister of Pensions about your retirement savings in the box below

Steve Webb: Find out how to ask the former Minister of Pensions about your retirement savings in the box below

Steve Webb: Find out how to ask the former Minister of Pensions about your retirement savings in the box below

To recap the basics, most people have a standard tax-free personal allowance of £12,570 per annum. This is the amount you can receive in earnings, pensions, and other forms of taxable income before tax is due.

A ‘fiscal regulation’ is a way of telling your employer or pension provider how much tax you must withhold before you pay your wages or pension.

In the simple case where you have one company pension and no other taxable income, your pension scheme will be given a tax code which will lead them to deduct one twelfth of your allowance of £12,570 from your monthly pension and withhold income tax on what is left.

If you have two sources of taxable income, for example AOW and company pension, things are a bit more complicated.

What happens in practice is that HMRC first looks at your AOW. To keep it simple, we now assume that you receive state pension for the entire financial year.

In most cases, the AOW amount will be lower than the personal allowance. So it is the practice that the state pension is paid in full (without tax deduction), but your tax code is reduced by the amount of your state pension.

What remains is your unused tax credit. This residual amount is then converted into a tax code that is sent to your company pension scheme and they then withhold income tax on everything above your residual personal allowance.

Now we will discuss your situation, in which your state pension starts in the course of the year.


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What HMRC has done is include the full 12-month value of your state pension in your tax code calculation, even though you don’t get that much in the current financial year.

This, understandably, made you worry that you might be paying too much tax.

In response, HMRC has said that while it has taxed the full annual state pension amount and that this lowers the tax-free figure sent to your private pension providers, this lower tax-free amount is *only* applied to the monthly payments for the remainder of the financial year.

In other words, for the months before your AOW benefit started, you enjoyed your full personal allowance and the lower personal allowance only starts for the period that your total taxable income is higher.

This ensures that the correct amount of tax is withheld for the entire year.

You have indicated that you understand this explanation, but that it would have been better if you had received the explanation before your tax law was lowered. A similar comment was made by the other reader who contacted me regarding this issue. I have fed this point back to HMRC.

Commenting, HMRC said: ‘Clients who start taking their state pension halfway through a tax year can be reassured that, while their tax code may look different, it is calculated correctly.

“As explained in the letter we send to customers, we are adjusting their personal deductions to make sure they pay the right taxes and don’t end up with a higher bill next year.”

Ask Steve Webb a retirement question

Former Pensions Secretary Steve Webb is This Is Money’s Agony Uncle.

He’s ready to answer your questions whether you’re still saving, retiring or juggling your finances in retirement.

Steve left the Department of Work and Pensions following the May 2015 election. He is now a partner at actuary and consultancy firm Lane Clark & ​​Peacock.

If you would like to ask Steve a question about pensions, please email him at

Steve will do his best to answer your message in a future column, but he won’t be able to reply to everyone or correspond privately with readers. Nothing in his answers constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a daytime phone number with your message – this will be kept confidential and will not be used for marketing purposes.

If Steve can’t answer your question, you can also contact MoneyHelper, a government-backed organization that provides free retirement assistance to the public. It can be found here and the number is 0800 011 3797.

Steve get a lot of questions about AOW forecasts and COPE – the Contracted Out Pension Equivalent. When you write to Steve on this topic, he’s answering a typical reader question here. It contains links to several of Steve’s previous columns on state pension and outsourcing projections, which may be helpful.

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