HMRC has issued clarification on state pension tax code changes, confirming that the state pension is taxable but tax is not deducted at source by the Department for Work and Pensions (DWP). Instead, HMRC adjusts tax codes to recover any tax owed later.
State Pension Tax Rules Clarified
For years, state pensioners whose only income is the state pension have not paid tax because their payments have remained below the £12,570 personal allowance. However, HMRC has reminded pensioners that the state pension has always been liable to tax. In a message on X, HMRC's Customer Support account explained: "The State Pension is taxable, but the DWP doesn't take tax at source, so we change your tax code to give enough of your tax free allowance to match the State Pension, leaving whatever's left for a private pension."
Impact of Triple Lock
The triple lock guarantee ensures the state pension rises annually by the highest of average earnings growth, September's inflation figure, or 2.5%. With earnings growth at 4.8%, the full new state pension is projected to reach around £12,548 from April 2027, exceeding the frozen personal allowance of £12,570. This means pensioners with only the new state pension would owe tax for the first time.
Government Exemption for Low-Income Pensioners
Chancellor Rachel Reeves confirmed in her latest Budget that state pensioners whose only income is the state pension will be exempt from tax on their DWP payments from April 2027. However, the government has not yet detailed how the exemption will work. It will not apply to those receiving the basic state pension with additional payments.
Rachel Vahey, head of public policy at AJ Bell, commented: "Low income pensioners have been promised that, from April 2027 when the full state pension is projected to exceed the tax-free personal allowance, nobody will pay tax if their only income came from the state pension. That measure is designed to avoid the unwelcome optics of government giving pensioners a benefit on one day, only to then ask for some of it back the next."
Uncertainty and Long-Term Implications
Vahey added: "It is still unclear exactly how the policy will be implemented and it’s hard to see how such a measure can last long-term. State pension incomes will continue to grow faster than the frozen personal allowance until at least 2031, by which time the tax break could be worth hundreds. But it will only apply to those with the state pension as their sole source of income and there are no plans to extend it to low income pensioners with private pension income. It means two pensioners on identical incomes could find only the one with private savings has to pay any tax."
The situation is set to become more complex as the state pension rises, and pensioners are advised to check their tax codes and understand their liabilities.
