Employment Tax

PAYE for pension schemes

Produced by Tolley in association with Vince Ashall
  • 19 Oct 2021 23:24

The following Employment Tax guidance note Produced by Tolley in association with Vince Ashall provides comprehensive and up to date tax information covering:

  • PAYE for pension schemes
  • Introduction
  • Deductions from pensions
  • Attachment of earnings orders (AEO)
  • Voluntary deductions
  • Student / postgraduate loans
  • Real time information (RTI)
  • Setting up a pension payment under RTI
  • Guidance for employers making pension payments
  • Employer pays the pension to an employee who has just retired from working for the employer
  • More...

PAYE for pension schemes

Introduction

In general terms, running PAYE for pension schemes is no different than running PAYE for employees. Pensions are treated as income for PAYE and so pensioners are issued with a tax code (see the Notices of coding guidance note) and tax is deducted accordingly.

The major difference between a ‘pensioner payroll’ and an ‘employee payroll’ is that no NIC is due on pensions (this is on the assumption that the pension is being paid from a pension scheme registered with HMRC).

Deductions from pensions

Apart from NICs, other deductions, with one further exception, can be made from pension payments in the same way as they are taken from earnings.

Attachment of earnings orders (AEO)

Pensions are treated as earnings for AEO purposes. Thus, AEO may be received in respect of pensioners.

Voluntary deductions

The pension payer needs authorisation from the pensioner in order to take voluntary deductions from the pension, see the Income and deductions guidance note.

Student / postgraduate loans

The calculation for a student loan deduction (SLD) / postgraduate loan deduction (PGLD) is based on the earnings that are used to determine the amount of Class 1 NIC due (see the Student and postgraduate loan deductions guidance note).

As a pension is not earnings for Class 1 NIC purposes, no SLD / PGLD can be made from a pension payment.

Real time information (RTI)

Pension payers have to make returns to HMRC under the RTI process in the same manner as employers. This means submitting a full payment submission (FPS) on or before payday. See the RTI ― reporting ‘on or before’ time of payment guidance note. It is unlikely that an employer payment summary (EPS) will need to be made, since pension payments confer no entitlement to statutory payments. An EPS is only required if there are no pension payments being made at all for the relevant payroll.

Setting up a pension payment under RTI

HMRC has issued guidance covering how to establish a new pensioner’s tax code and how the pension

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