I was 66 earlier this month. I've had my pension letter to confirm I am getting a state pension of £203 a week - a lower amount due to factors with my private pension.

How will the two pensions be taxed and how is my tax code calculated?

Do my savings accounts and the interest earned have anything to do with the tax code I am given?

I retired early several years ago, drawing my private pension that is lower than the annual tax threshold on its own, but that will change when I get the state pension as well.

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Steve Webb replies: As things stand, your company pension and other taxable income are below the tax-free personal allowance of £12,570.

This means that your private pension provider is paying your pension without deducting any income tax.

As you have worked out, once you start receiving your state pension, this will change.

Although state pensions count as taxable income, they are always paid gross – that is, without the deduction of any income tax.

However, as you rightly say, when you add your state pension of over £10,000 per year to your private pension, this takes you over the tax threshold and you start to become an income tax payer.

The good news is that the Pay-As-You-Earn (PAYE) system should come into play and ensure that the right amount of tax is collected over the course of the year without further action on your part.

What happens is that DWP (which pays your state pension) will notify HMRC how much state pension it is paying you.

HMRC will know about your private pension from information supplied to it by your pension provider and will be able to see that you are now a taxpayer.

HMRC should then issue a new 'tax code' to your private pension provider requiring it to start deducting income tax before your private pension is paid.

One consequence of this is that once you state pension is in payment you will see a cut in the amount of private pension you receive into your bank account.

The tax code is set so that, if everything works smoothly, by the end of the tax year, the total amount of tax deducted by your private pension provider should match the amount of tax due on your total income from your state pension and your private pension combined.

Turning now to any taxable income you have coming in from savings or investments, I have written in greater detail about how this is taxed here: Do rising interest rates mean more people have to do a tax return?

However, the key points which are relevant in your situation are:

- You have a 'personal savings allowance'; as a basic rate taxpayer this is £1,000 per year; provided that your interest income and so on is under this figure, this will all be tax free;

- In addition, you have something called a 'starting rate' of tax for saving which is 0 per cent; if your combined income from your state pension and private pension is less than £5,000 above the tax threshold (in other words, less than £17,570 this year) then anything spare up to that figure can be set against your remaining taxable income from savings; for example, if your state and private pension come to £15,750, you can have another £2,000 of interest income which is tax free;

- If your savings income comes in the form of dividends (held outside Isas and so on) then there is a further £500 per year tax-free allowance. There is also a special lower rate of tax on dividends for basic rate taxpayers of 8.75 per cent.

As with your private pension, your interest income will usually be reported directly to HMRC by your bank or building society.

If any of this exceeds your allowances as described above, this will also be factored in to your tax code so that the right total amount of tax is paid.

In summary, for most people with relatively simple tax affairs in retirement such as a state pension, a private pension and some modest interest income, the correct amount of tax should be deducted automatically without further action on your part.

However, if you happen to have other income not known to HMRC, such as rental income on a property, then this would have to be declared via completing a self-assessment tax return so that the correct amount of tax can be collected.