Last updated: 14 October 2026
Do you have to pay tax owed on your pension all at once?
Not always. If you owe tax because your pension wasn’t taxed correctly, HMRC can usually collect up to £3,000 through your tax code over the next tax year, spreading the cost over your pension payments. Larger amounts, or tax due through Self Assessment, can often be paid by instalments under a Time to Pay arrangement. If the tax is an annual allowance charge on pension savings, you may be able to ask your scheme to pay it from your pension using “scheme pays”.
Ways tax can be spread
| Situation | Options |
| Underpayment up to £3,000 from PAYE | Collected through next year’s tax code |
| Self Assessment bill up to £30,000 | Online Time to Pay plan, up to 12 months or more |
| Larger bills | Time to Pay by agreement with HMRC |
| Annual allowance charge over £2,000 | Scheme pays: the pension scheme pays and reduces your benefits |
| Tax on a pension lump sum | Usually taxed through PAYE at the time, with refunds claimable |
Why pensioners end up owing tax
- The State Pension, currently £241.30 a week, uses up most of the Personal Allowance, so private pensions are taxed at 20% from the first pound
- Two or more pensions, with tax codes that don’t add up
- Taking a flexible lump sum on an emergency code
- Savings interest above your allowances
Example
Brian, 70, receives a State Pension and two workplace pensions. HMRC finds he underpaid £1,800 in 2025/26 because one pension used his full Personal Allowance. HMRC adjusts his 2026/27 tax code, collecting £150 a month through his pension. He doesn’t have to pay a lump sum.
Paying through your tax code
HMRC normally collects an underpayment through your code if it’s under £3,000 and you have PAYE income. You can opt out if you’d rather pay in one go. HMRC won’t use this method if it would mean taking more than half your pension income.
Time to Pay
For Self Assessment debts up to £30,000, you can set up a payment plan online if you’re within 60 days of the due date and have no other debts. Interest is charged on the outstanding amount at 7.75%.
If you think the tax is wrong
Check your P800 calculation or tax return carefully. Common errors include the wrong pension amounts or an incorrect State Pension figure. Ask HMRC to review if you disagree.
Common mistakes
- Ignoring a P800 or Simple Assessment letter, which can lead to interest and penalties
- Not telling HMRC when you start drawing a new pension
- Paying an underpayment in full and then also having it collected through your code; check your coding notice
- Missing the deadline to ask for a Time to Pay arrangement
If you are struggling to pay, contact HMRC before the due date. It is usually more flexible when you get in touch early.
Frequently asked questions
Does HMRC charge interest on PAYE underpayments collected through my code?
No.
Can I pay the tax early?
Yes, by paying online.
Will my pension provider deduct it?
Yes, through PAYE.
Does the State Pension have tax taken off?
No, it’s paid gross and taxed through other income.
Related: why you’re paying tax on your pension, paying tax on the State Pension and the 25% tax-free pension lump sum.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with tax on pensions and payment plans. See our small business accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
