Chancellor Rachel Reeves is reportedly considering changes to the state pension tax system that would see money deducted directly from pensioners' payments before they receive them from the Department for Work and Pensions (DWP), according to a report by City AM. The proposed changes are said to be drawn up behind closed doors to address the issue of state pensioners who owe tax on their state pension.
Tax exemption for low-income pensioners
Last year, Reeves pledged that state pensioners with no other income—such as savings, earnings, or property income—would not be made to pay tax on their DWP state pension payments, even if the triple lock increased their annual payments above the frozen £12,570 Income Tax threshold. This threshold is expected to be breached in April 2027, when even the minimum 2.5% increase would raise state pension payments to more than £12,570 a year for post-2016 state pensioners with a full National Insurance record.
On the Martin Lewis Money Show Live on ITV1 in November, Reeves confirmed the tax exemption for state pensioners with no other income. She said: “I’m only making that commitment for people who just get the state pension, obviously a lot of people in retirement do um self-assessment and do pay tax on their income, and that’s not going to change, but I do recognise that those just in receipt of the basic state pension or the new state pension it wouldn’t be the right thing to do to try to tax those small amounts of money.”
Proposed changes to tax collection
However, pensioners who have any other income on top of their state pension payments will still be required to pay tax. This is not a change in policy, as state pensioners already pay tax on their state pension if they earn more than the threshold. The reported change would see state pensioners taxed on their state pension payments before they even receive the payment from the DWP.
According to City AM, the government’s plan is to outsource the system to a private sector contractor once the policy is implemented. Options under consideration include deductions for all state pension payouts at a default 20% basic rate, with the total tax owed by pensioners calculated at the end of the tax year when assessed with their other sources of income.
The DWP has been contacted for comment.
