The Department for Work and Pensions (DWP) has issued a statement clarifying that there has been no change to the tax treatment of the state pension, following reports that the Treasury was planning to automatically deduct income tax from payments before distribution. A Government spokesperson said: "There has been no change to the tax treatment of the state pension. The Government routinely undertakes research to better understand pensioners' experiences with the tax system."
Current Tax Arrangements for State Pension
Currently, state pension payments are transferred into bank accounts without any deductions. However, the state pension is classified as taxable income, similar to wages or private pension income. If a pensioner is liable for income tax, HMRC collects it through tax code adjustments, self assessment, or simple assessment. A report by City AM suggested the Treasury was considering deducting tax at source, akin to employer payroll deductions, but the DWP has not confirmed any such plans.
New Policy to Exempt Sole State Pension Recipients
Chancellor Rachel Reeves announced in the Autumn Budget 2025 that a new policy will ensure that individuals whose sole income is the state pension, without any additional increments, will not be liable for income tax. This exemption is necessary because the full new state pension is nearly at the threshold for triggering tax liability. The full new state pension currently stands at £241.30 per week, approximately £12,550 a year, just below the £12,570 personal allowance.
State pension payments rise each April under the triple lock policy, which increases payments by the highest of 2.5%, inflation, or average earnings growth. This year, the triple lock delivered a 4.8% rise. Without the new policy, the full new state pension would incur a tax bill next year under current rules.
Treasury Commitment and Implementation Timeline
An HM Treasury spokesperson stated: "Anyone whose only income is the full new or basic state pension without any increments will not pay income tax, and we are committed to that over this Parliament. By keeping the triple lock, 12 million pensioners will see their income rise by up to £470 this year, and they continue to benefit from the highest personal allowance in the G7." HMRC officials previously told MPs that new legislation would be required to implement the change, suggesting it could be introduced via the 2026 autumn finance bill.
