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 deduct income tax automatically from payments before they are paid out.
State pension payments increase each April in line with the triple lock policy, which provided a 4.8% hike this past April. Under current rules, state pension payments are made without any deductions, but they count as taxable income, similar to wages or other pension income. If tax is owed, HMRC can collect it by adjusting tax codes, through self-assessment, or via simple assessment.
Reports of Automatic Tax Deductions Denied
A report by City AM suggested that the Treasury was drawing up plans to automatically deduct income tax from state pension payments before they are paid, similar to how employers deduct Pay As You Earn (PAYE) taxes from wages. However, a Government spokesperson stated: "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."
New Policy to Exempt Some Pensioners from Income Tax
Despite denying the automatic deduction plans, tax officials are working on a significant change announced by Chancellor Rachel Reeves at the Autumn Budget 2025. Under this policy, people whose only income is the state pension without any increments will not have to pay income tax. This exemption is necessary because the full new state pension is nearing the personal allowance threshold.
The full new state pension currently pays £241.30 per week, or approximately £12,550 per year, just below the £12,570 personal allowance—the maximum amount you can earn each tax year without paying income tax. With the triple lock policy, the full new state pension will likely exceed this threshold next year, incurring a tax bill under current rules.
Government Commitment to Triple Lock and Tax Exemption
An HM Treasury spokesperson confirmed: "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 stated that legislation would be required to enact the change, and it may be included in the 2026 autumn finance bill. The DWP statement reinforces that no immediate changes to tax deductions are being made, but the new exemption policy will protect low-income pensioners from tax bills as the state pension rises.
