HMRC PAYE update 138

HMRC have provided a further informal update on PAYE related matters for sharing. The update covers the PAYE tax code change as applied to 'trivial commutation' and similar one-off lump sum pension payments from registered pension schemes.

HMRC update starts here

PAYE tax code change

From April 2013 - a change in the tax code applied to 'trivial commutation' and similar one-off lump sum pension payments from registered pension schemes.

Under pension tax rules, for registered pension schemes, pension payers are able to convert certain small pensions into a one-off cash payment. Subject to certain conditions, a maximum of 25% of the value of most of these small pensions can be converted to a tax free lump sum. The tax code is then applied to the remaining taxable portion of the lump sum.

Currently, pension payers are required to operate the emergency tax code (code 810L for 2012-13) on the non-cumulative (week 1 / month 1) basis on the lump sum pension payment. Applying the emergency code in this way results in many lump sum payments of this type attracting the higher, and possibly additional, rates of tax. And in many cases this leaves the payment recipient in a position where they temporarily overpay tax.

From 6 April 2013, it is proposed that the basic rate (BR) tax code (operated on the non-cumulative basis) will apply. We believe this change will result in more individuals, in particular those on low to moderate incomes, paying the right amount of tax at the time the lump sum pension payment is made.

Trivial commutation and similar one-off lump sum pension payments include:

  • trivial commutation lump sums,
  • trivial commutation lump sum death benefits, 
  • winding up lump sums,
  • winding up lump sum death benefits,
  • commuted equivalent pension benefits,
  • certain small lump sum payments and
  • ‘small pot’ commutations.


Draft legislation and a technical note relating to PAYE and Real Time Information changes, including this proposed change, will be made available for comment on the HMRC website for a period of eight weeks from 15 November 2012. You will be able to access the documents from the 'What’s New' link on the HMRC home page.

Note: The P53 form and process, used to claim any overpaid tax will continue to exist in its present form. However, HMRC are currently working with representative bodies to improve both the form and process for individuals, pension payers and HMRC.

Technical Team

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